•Widespread awareness, acceptance and adoption of our products by the radiation oncology and cancer therapy markets;
•Innovations that improve the effectiveness and productivity of our
systems'systems’ treatment processes and enable them to address emerging customer needs;•Availability of reimbursement coverage from
third-partythird‑party payors (including insurance companies, governments, and/or others) for procedures performed using our systems;•Inclusion of radiotherapy in countries’ cancer treatment policies as an effective treatment modality;
Published,
peer-reviewedpeer‑reviewed data supporting the efficacy and safety of our systems;•Limiting the time required from proof of feasibility to routine production;
•Limiting the time period and cost of regulatory approvals or clearances;
•The manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associated with manufacturing, installation, warranty and maintenance of the products;
•Our ability to attract and retain qualified personnel;
•16
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The extent of our intellectual property protection or our ability to otherwise develop proprietary products and processes;
Our ability to
otherwise develop proprietary productssuccessfully expand into new andprocesses;•- developing markets;
Securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts; and
•Obtaining and maintaining any necessary United States or foreign regulatory approvals or clearances.
Our
customers'customers’ equipment purchase considerations typically include reliability, treatment quality, service capabilities, patient throughput, price, payment terms and equipment supplier viability. We believe we compete favorably with our competitors on price and value based upon the technology offered by our treatment systems. We strive to provide a technologically superior product that covers substantially all aspects of radiation therapy to deliver precise treatments withhigh-qualityhigh‑quality clinical outcomes that meet or exceed customer expectations.In addition to competition from technologies performing similar functions as our treatment systems, competition also exists for the limited capital expenditure budgets of our customers. For example, our treatment systems may compete with other equipment required by a radiation therapy department for financing under the same capital expenditure budget, which is typically limited. A purchaser, such as a hospital or cancer treatment center, may be required to select between the two items of capital equipment. Our ability to compete may also be adversely affected when purchase decisions are based solely upon price, since our products are
premium-pricedpremium‑priced systems due to their higher level of functionality and performance.USU.S. ReimbursementIn the United States, healthcare providers that purchase capital equipment such as the CyberKnife and TomoTherapy Systems generally rely on government and private
third-partythird‑party payors for reimbursement for the healthcare treatment and services they provide. Examples of these types of payors include Medicare, Medicaid, private health insurance plans, and health maintenance organizations, which reimburse all or a portion of the cost of treatment, as well as related healthcare services. Reimbursement involves three components: coverage, coding and payment.Coverage
There are currently no
national coverage determinationsNational Coverage Determinations in place under Medicare for CyberKnife or TomoTherapytreatment. Coveragetreatments. Medicare coverage criteria fortreatment withtreatments performed on a CyberKnife and TomoTherapy is outlined inlocal determinationsLocal Coverage Determinations or, in the absence of a formal policy, treatment is covered as long as it is considered reasonable and necessary. The most common indications covered by Medicare inlocal coverage determinationsLocal Coverage Determinations forrobotic radiosurgeryradiotherapy are primary and metastatic tumors in the brain, spine, lung, liver, kidney, pancreas, adrenal gland, head and neck, breast, prostate, abdominal and retroperitoneal regions, as well as other cancers that have failed previous treatment.Intensity modulated radiation therapy is generally covered for cancers of the brain, spine, head and neck, prostate, thoracic, abdominal and retroperitoneal regions, other cancers (e.g. breast) meeting certain criteria, and tumors requiring re-irradiation or where dose tolerance may be exceeded with conventional treatment.Commercial payor policies vary with
most covering radiosurgeryrespect to coverage fortumors in the brain, spine, lung, and increasingly prostate. Other indications such as renal, liver, and pancreatic cancers are also covered by some national and local commercial payors. IMRT and 3D Conformal are typically covered by commercial payors forradiotherapy including many of the indications covered byMedicare.Medicare, though coverage criteria may differ.Coding
The codes that are used to report radiosurgery treatment delivery in
20152019 for the hospital outpatient department are Current Procedural Terminology (CPT) codes 77372 and 77373 for single fraction intracranial radiosurgery and single fraction extracranial/multi-sessionmulti‑session radiosurgery/stereotactic body radiation therapy. Forsingle session cranial SRS, CMS proposes to retain in 2016 the Comprehensive APC (C-APC) it implemented in 2015 for several services delivered on the day of treatment, but will also allow for billing of some ancillary services that will be tracked for two years. Forfreestanding centers,Centers for Medicare and Medicaid Services (CMS) has retained therobotic radiosurgery is billed with robotic radiosurgery Healthcare Common Procedural Codes (HCPCs)G codes that are currently regionally priced by Medicare ContractorsG0339 andhas not proposed replacing them with the CPT codes 77372 and 77373, currently in use in the hospital outpatient setting.G0340. Thenonroboticnon‑robotic SRS/SBRT codes 77372 and 77373haveare alsobeen maintained aspayable codes in the freestanding site ofservice.service for non‑robotic SRS/SBRT.17
In
2015,2019, in the hospital outpatient department,the code historically used to bill forIMRT delivery77418, was replaced by two codes to designate simple and complex IMRT;is billed under CPT code 77385 for prostate, breast and physical compensator IMRT and 77386 for all other treatments.PriorFor 3D CRT three codes are used to2015, 3DConformal treatment had typically been billed under multiple CPT codes; 77413 were used by hospitals to bill for TomoTherapy treatment. In 2015, the 3D conformal codes were replaced by codes to designatereport simple, intermediate, and complex3D-CRT.treatments. Treatments using the TomoTherapyis nowSystems, which are considered complex treatments, are reported under the complex3D-CRT3D‑CRT code77413.77412. In December 2015, the Patient Access and Medicare Protection Act (PAMPA) stoppedthesethe IMRT and 3D CRT delivery codesand their associated payment ratesfrom being implemented and prevented reimbursement reductions in the freestanding center settinguntilthrough calendar year 2019.UntilAlthough the payment freeze is set to expire on December 31, 2019,a series ofCenters for Medicare and Medicaid Services (CMS) has indicated in the 2020 Medicare Physician Fee Schedule Proposed Rule that it will continue to recognize the temporary G codeswill be used.and maintain payment stability in calendar year 2020. We expect all valid delivery codesshouldwill be recognized by commercial payers. Other codes are used to report treatment planning, dosimetry, treatment management, and other procedures routinely performed for treating radiosurgery or radiotherapy patients.PaymentThePaymentIn the United States, the majority of procedures using the CyberKnife, TomoTherapy, and
TomoTherapyRadixact Systems are performed in the hospital outpatient department. Payment rates under the Medicarepayment for CyberKnife and TomoTherapy procedures delivered in the hospital outpatient setting is developed by CMS, which calculates ratesfee-for-service methodology are established based oncostscost data submitted byhospitals to perform outpatient procedures. Every year,hospitals. CMSreviews hospital cost datapays separately foroutpatientancillary proceduresincluding radiosurgery and radiotherapy, makes adjustments to rates for the following year, and publishes national unadjusted averages for all procedures eligible for payment in this site of service. In 2017, CMS proposes to track, and pay separately, certain ancillaryin addition to thecomprehensivedelivery of IMRT, 3D CRT, and SRS/SBRT as well as a Comprehensive APC that bundles delivery and some ancillary services for single session cranial radiosurgery.After two years we expect CMS will likely repackage all services in the C-APC. The changes proposed for 2017, if implemented, would result in an approximate 3% increase in total technical services for single fraction intracranial SRS over 2016. For single fraction extracranial/multi session SRS/SBRT delivery code (77373), CMS proposes to reduce payment by 1% in 2017, however, when adding in ancillary codes no significant changes in total payment to hospitals are proposed for 2017.PaymentsPayment for treatment with CyberKnife and TomoTherapy Systems are also available in the freestanding centersettings.setting. In2016 and proposed for 2017,2019, the primary treatment delivery codes for robotic radiosurgery arecarrierpriced by the regional Medicare Administrative Contractors. In 2020, it is expected the robotic SRS/SBRT delivery codes will remain contractor priced for providers paid underMedicarethe traditional fee-for-service methodology. Payment rates for IMRT andrange from low payment to payment at parity with hospital outpatient departments to slightly above outpatient rates. TomoTherapy3DRT procedures are set by CMSand the American Medical Association nationally,with adjustments to account for geographic market variations.With the exception of a few ancillary codes that CMS has identified as potentially misvalued, noNo major cuts by CMS have occurred to IMRT and 3DCRT in the past three years and payment is expected to remain stable through 2020.In July 2019, CMS released a proposed rule titled Medicare Program; Specialty Care Models to Improve Quality of Care and Reduce Expenditures. If finalized as proposed, this rule would significantly alter CMS’ payment methodology for radiation oncology services. Specifically, payment would be determined by the patient’s diagnosis and include all radiation oncology services provided within a 90-day period. Providers may be mandatorily required to participate in this model based upon the location where the radiation treatment is provided to the Medicare beneficiary. CMS projects that 40% of the radiation oncology providers will be
madeincluded in2017the model and 60% will continue to receive reimbursement based on fee-for-service methodology. If implemented as proposed, CMS anticipates that this model will result in 3-5% savings to the2015 Patient Access andMedicareProtection Act freeze payment at 2016 levels through 2018. Non robotic SRS/SBRT payment is also linked to 2016 levels which increased by 8% over 2015, primarily due to changes in practice and malpractice expense inputs.program.The federal government
and Congress reviewreviews and adjust rates annually, and from time to time consider various Medicare and other healthcare reform proposals that could significantly affect both private and public reimbursement for healthcare services, including radiotherapy and radiosurgery, in hospitals andfree-standingfree‑standing clinics. In the past, we have seen ourcustomers' decision-makingcustomers’ decision‑making process complicated by the uncertainties surrounding reimbursement rates for radiotherapy and radiosurgery in the United States. State government reimbursement for services is determined pursuant to eachstate'sstate’s Medicaid plan, which is established by state law and regulations, subject to requirements of federal law and regulations.Foreign Reimbursement
Internationally, reimbursement and healthcare payment systems vary from country to country and include
single-payor, government-managedsingle‑payor, government‑managed systems as well as systems in which private payors andgovernment-managedgovernment‑managed systems existside-by-side.side‑by‑side. In general, the process of obtaining coverage approvals has been slower outside of the United States. Our ability to achieve adoption of our treatment systems,and significant sales volume in international markets, will depend in part on the availability of reimbursement for procedures performed using our products.
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Domestic Regulation
Our products and software are medical devices subject to regulation by the FDA, as well as other regulatory bodies. FDA regulations govern the following activities that we perform and will continue to perform to ensure medical products distributed domestically or exported internationally are safe and effective for their intended uses:
•Product design and development;
•Document and purchasing controls;
•Production and process controls;
•Labeling and packaging controls;
•Product storage;
•Recordkeeping;
•Servicing;
•Corrective and preventive action and complaint handling;
•Pre-marketPre‑market clearance or approval;
•Advertising and promotion; and
•Product sales and distribution.
FDA
pre-marketpre‑market clearance and approval requirements. Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either 510(k) clearance orpre-marketpre‑market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA apre-marketpre‑market notification requesting permission to commercially distribute the device, known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such aslife-sustaining, life-supportinglife‑sustaining, life‑supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k)device,devices, are placed in class III, requiringpre-marketpre‑market approval. All of our current products are class II devices requiring 510(k) clearances.510(k) clearance pathway. When a 510(k) clearance is required, we must submit a
pre-marketpre‑market notification demonstrating that our proposed device is substantially equivalent to a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission ofpre-marketpre‑market approval applications (PMA). Byregulation,statute, the FDAis requiredhas targets to clear or deny a 510(k)pre-marketpre‑market notificationwithinafter 90 days of review from submission of the application. Clearance generally takes longer as the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence.In January 2002, we received 510(k) clearance for the TomoTherapy
Hi-ArtHi‑Art System intended to be used as an integrated system for the planning and delivery of IMRT for the treatment of cancer. In August 2008, we received 510(k) clearance for our TomoDirect System. In June 2016, we received 510(k) clearance for the Radixact Treatment Delivery Platform. We also received 510(k) clearance for our new treatment planning and data management systems, Accuray Precision Treatment Planning System and iDMS Data Management System. In November 2018, we received 510(k) clearance for Synchrony motion tracking and correction technology for the Radixact System.19
In July 1999, we received 510(k) clearance for the CyberKnife System for use in the head and neck regions of the body. In August 2001, we received 510(k) clearance for the CyberKnife System to provide treatment planning and image guided stereotactic radiosurgery and precision radiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment is indicated. In April 2002, we received 510(k) clearance for the Synchrony Motion Tracking System as an option to the CyberKnife System, intended to enable dynamic image guided stereotactic radiosurgery and precision radiotherapy of lesions, tumors and conditions that move under influence of respiration. In October 2012, we received 510(k) clearance for the InCise MLC with clearance from the FDA on July 1, 2015.
Pre-marketPre‑market approval (PMA) pathway. A PMA must be submitted to the FDA if the device is not eligible for the 510(k) clearance process. A PMA must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate reasonable evidence of thedevice'sdevice’s safety and efficacy to theFDA'sFDA’s satisfaction. Currently, no device we have developed and commercialized has requiredpre-marketpre‑market approval.Product modifications. After a device receives 510(k) clearance or a PMA approval,
anyit may be changed or modified. Any modification that could significantly affect its safety or effectiveness, or that would constitute a significant change in its intended use, will require a new clearance or approval. Regulations provide that the manufacturer initially determines when a specific modification requires notification to FDA. The FDA has issued draft guidance that, if finalized and implemented, will result in manufacturers needing to seek a significant number of new clearances for changes made to legally marketed devices. The FDA reviews the manufacturer’s decision to file a 510(k) or PMA for modifications during facility audits.We have modified aspects of our CyberKnife and TomoTherapy
families of productsSystems since receiving regulatory clearance, and we have applied for and obtained additional 510(k) clearances for these modifications when we determined such clearances were required. The FDArequires each manufacturer to make this determination initially, but the FDA canmay reviewany suchour 510(k) filing decision, and can disagree witha manufacturer'sour initial determination.If theFDA may take regulatory action from requiring new filings to injunction if it disagrees with ourdeterminationdeterminations not to seek a new 510(k) clearance or PMA approvalthe FDA may require us to seek 510(k) clearance or PMA approval.for modifications. The FDAcould also require us to cease marketingreviewed anddistribution and/or recallcleared themodified device until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. During our fiscal year ended June 30, 2014, we submitted one 510(k) clearance notification for modifications made to the operationmost recent versions of the CyberKnife System andone 510(k) clearance notification forTomoTherapy Systems, including theTomoTherapy System. The initial CyberKnife submission was cleared on October 26, 2012 and the TomoTherapy submission was cleared on August 29, 2012.Radixact System, in this fiscal year.Pervasive and continuing regulation. After a device is placed on the market, numerous regulatory requirements apply. These include:
•Quality System Regulation (QSR), which require manufacturers, including
third-partythird‑party manufacturers, to follow stringent design, testing, documentation and other quality assurance procedures during product design and throughout the manufacturing process;•Labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or
off-labeloff‑label uses; and•Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur.
The FDA has broad
post-marketpost‑market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health Services to determine our compliance with the QSR and other regulations, and theseinspections may include the manufacturing facilities of some of our subcontractors. Our
Sunnyvale facility, where we manufacture the CyberKnife Systems, was most recently inspected by the FDA in June 2015. The June 2015 inspection resulted in no observations. In addition, ourMadison facility, where we manufacture the finished TomoTherapy and CyberKnife Systems, was most recently inspected by the FDA inJuly 2012.August 2017. TheJuly 2012August 2017 inspection resulted in no observations. We believe we are in substantial compliance with the QSR. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:•Fines, injunctions, consent decrees and civil penalties;
•Recall or seizure of our products;
•Operating restrictions, partial suspension or total shutdown of production;
•Refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses;•20
•
Refusing our requests for 510(k) clearance or pre‑market approval of new products or new intended uses;
Withdrawing 510(k) clearance or
pre-marketpre‑market approvals that are already granted; and•Criminal prosecution.
The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on our business.
Radiological health. Because our CyberKnife and TomoTherapy Systems contain both laser and
X-rayX‑ray components, and because we assemble these components during manufacturing and service activities, we are also regulated under the Electronic Product Radiation Control Provisions of the United States Federal Food, Drug, and Cosmetic Act. This law requires laser andX-rayX‑ray products to comply with regulations and applicable performance standards, and manufacturers of these products to certify in product labeling and reports to the FDA that their products comply with all such standards. The law also requires manufacturers to file new product reports, and to file annual reports and maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed. Assemblers of diagnosticX-rayX‑ray systems are also required to certify in reports to the FDA, equipment purchasers, and where applicable, to state agencies responsible for radiation protection, that diagnostic and/or therapeuticX-rayX‑ray systems they assemble meet applicable requirements. Failure to comply with these requirements could result in enforcement action by the FDA, which can include injunctions, civil penalties, and the issuance of warning letters.Fraud and abuse laws. We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including
anti-kickbackanti‑kickback laws and physicianself-referralself‑referral laws. Violations of these laws are punishable by significant criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Because of thefar-reachingfar‑reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. Evolving interpretations of current laws or the adoption of new federal or state laws or regulations could adversely affect many of the arrangements we have with customers and physicians. In addition, there can be no assurance that the occurrence of one or more violations of these laws or regulations would not result in a material adverse effect on our financial condition and results of operations.Anti-kickbackAnti‑kickback laws. Our operations are subject to broad and changing federal and stateanti-kickbackanti‑kickback laws. The Office of the Inspector General of the Department of Health and Human Services (OIG),is primarily responsible for enforcing the federalAnti-KickbackAnti‑Kickback Statute and generally for identifying fraud and abuse activities affecting government programs. The federalAnti-KickbackAnti‑Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providingremuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid.
"Remuneration"“Remuneration” has been broadly interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver of payments, and providing anything of value at less than fair market value.Penalties for violating the federal
Anti-KickbackAnti‑Kickback Statute include criminal fines of up to $25,000 and/or imprisonment for up to five years for each violation, civil monetary penalties, which could result in treble damages plus fines of up to $50,000 for each violation, and possible exclusion from participation in federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the federalAnti-KickbackAnti‑Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs, and do not include comparable exceptions.The OIG has issued safe harbor regulations which set forth certain activities and business relationships that are deemed safe from prosecution under the federal
Anti-KickbackAnti‑Kickback Statute. There are safe harbors for various types of arrangements, including, without limitation, certain investment interests, leases and personal services and management contracts. The failure of a particular activity to comply in all regards with the safe harbor regulations does not mean that the activity violates the federalAnti-KickbackAnti‑Kickback Statute or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.21
The OIG has identified the following arrangements with purchasers and their agents as ones raising potential risk of violation of the federal
Anti-KickbackAnti‑Kickback Statute:•Discount and free good arrangements that are not properly disclosed or accurately reported to federal healthcare programs;
•Product support services, including billing assistance, reimbursement consultation and other services specifically tied to support of the purchased product, offered in tandem with another service or program (such as a reimbursement guarantee) that confers a benefit to the purchaser;
•Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales and marketing considerations;
•Research funding arrangements, particularly
post-marketingpost‑marketing research activities, that are linked directly or indirectly to the purchase of products, or otherwise inappropriately influenced by sales and marketing considerations; and•Other offers of remuneration to purchasers that are expressly or impliedly related to a sale or sales volume, such as
"prebates"“rebates” and"upfront“upfront payments,"” other free orreduced-pricereduced‑price goods or services, and payments to cover costs of"converting"“converting” from acompetitor'scompetitor’s products, particularly where the selection criteria for such offers vary with the volume or value of business generated.We have a variety of financial relationships with physicians who are in a position to generate business for us. For example, physicians who own our stock also provide medical advisory and other consulting or collaboration services. Similarly, we have a variety of different types of arrangements with our customers. In the case of our former placement program, certain services and upgrades were provided without additional charge based on procedure volume. In the past, we have also provided loans to our customers. We also provide research or educational grants to customers to support customer studies related to, among other things, our CyberKnife and TomoTherapy Systems.
If our past or present operations are found to be in violation of the federal
Anti-KickbackAnti‑Kickback Statute or similar government regulations to which we or our customers are subject, we or our officers may be subject to the applicable penalty associated with the violation, including significant civil and criminal penalties, damages, fines, imprisonment, and exclusion from the Medicare and Medicaid programs. The impact of any such violation may lead to curtailment or restructuring of our operations. Any penalties, damages, fines, or curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that some of these laws are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert ourmanagement'smanagement’s attention from the operation of our business and damage our reputation. If an enforcement action were to occur, our reputation and our business and financial condition could be harmed, even if we were to prevail or settle the action. Similarly, if the physicians or other providers or entities with which we do business are found to benon-compliantnon‑compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.Transparency laws. The Physician Payment Sunshine Act (the Sunshine Act), which was enacted by Congress as part of the Patient Protection and Affordable Care Act on December 14, 2011, requires each applicable manufacturer, which includes medical device companies such as Accuray, to track and report to the federal government on an annual basis all payments and other transfers of value from such applicable manufacturer to U.S. licensed physicians and teaching hospitals as well as physician ownership of such applicable
manufacturer'smanufacturer’s equity, in each case subject to certain statutory exceptions. Such data will be made available by the government on a publicly searchable website. Failure to comply with the data collection and reporting obligations imposed by the Sunshine Act can result in civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum of $150,000 per reporting period) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum of $1 million per reporting period). In addition, we are subject to similar state and foreign laws related to the tracking and reporting of payments and other transfers of value to healthcare professionals. These laws require or will require that we implement the necessary and costly infrastructure to track and report such payments and transfers of value. Failure to comply with these new tracking and reporting laws could subject us to significant civil monetary penalties.22
Physician
self-referralself‑referral laws. We are also subject to federal and state physicianself-referralself‑referral laws. The federal Ethics in Patient Referrals Act of 1989, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain"designated“designated healthservices"services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral.In addition, in July 2008, CMS issued a final rule implementing significant amendments to the regulations under the Stark Law. The final rule, which was effective October 1, 2009, imposes additional limitations on the ability of physicians to refer patients to medical facilities in which the physician or an immediate family member has an ownership interest for treatment. Among other things, the rule provides that leases of equipment between physician owners that may refer patients and hospitals must be on a fixed rate, rather than a per use basis. Prior to enactment of the final rule, physician owned entities had increasingly become involved in the acquisition of medical technologies, including the CyberKnife System. In many cases, these entities entered into arrangements with hospitals that billed Medicare for the furnishing of medical services, and the physician owners were among the physicians who referred patients to the entity for services. The rule limits these arrangements and could require the restructuring of existing arrangements between physicians owned entities and hospitals and could discourage physicians from participating in the acquisition and ownership of medical
technologies. The final rule also prohibits
percentage-basedpercentage‑based compensation in equipment leases. As a result of the finalization of these regulations, some existing CyberKnife System operators have modified or restructured their corporate or organizational structures. In addition, certain customers that planned to open CyberKnife centers in the United States involving physician ownership have restructured their legal ownership structure. Certain entities were not able to establish viable models for CyberKnife System operation and therefore canceled their CyberKnife System purchase agreements. Accordingly, these regulations have resulted in cancellations of CyberKnife System purchase agreements and could also reduce the attractiveness of medical technology acquisitions, including CyberKnife System purchases, byphysician-ownedphysician‑owned joint ventures or similar entities. As a result, these regulations have had, and could continue to have, an adverse impact on our product sales and therefore on our business and results of operations.A person who engages in a scheme to circumvent the Stark
Law'sLaw’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violations of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed, and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.Federal False Claims Act. The federal False Claims Act prohibits the knowing filing or causing the filing of a false claim or the knowing use of false statements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between
$5,500$11,181 and$11,000$22,363 for each separate false claim. Suits filed under the False Claims Act, known as"qui tam"“qui tam” actions, can be brought by any individual on behalf of the government and such individuals, sometimes known as"relators"“relators” or, more commonly, as"whistleblowers,"“whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out of such action. We have retained the services of a reimbursement consultant, for which we pay certain consulting fees, to provide us and facilities that have purchased a CyberKnife or TomoTherapy System, with general reimbursement advice. While we believe this will assist our customers in filing proper claims for reimbursement, and even though such consultants do not submit claims on behalf of our customers, the fact that we provide these consultant services could expose us to additional scrutiny and possible liability in the event one of our customers is investigated and determined to be in violation of any of these laws.23
HIPAA. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.
As a participant in the healthcare industry, we are also subject to extensive laws and regulations protecting the privacy and integrity of patient medical information, including privacy and security
standards required under HIPAA. The HIPAA privacy standard was amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), enacted as part of the American Recovery and Reinvestment Act of 2009. HITECH significantly increases the civil money penalties for violations of patient privacy rights protected under HIPAA. Although we are not a covered entity under HIPAA, we have entered into agreements with certain covered entities under which we are considered to be a
"business associate"“business associate” under HIPAA. As a business associate, we are required to implement policies, procedures and reasonable and appropriate security measures to protect individually identifiable health information we receive from covered entities. Furthermore, as of February 2010, business associates are now directly subject to regulations under HIPAA, including a new enforcement scheme, criminal and civil penalties for certain violations, and inspection requirements.Foreign Corrupt Practices Act. The United States and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the Foreign Corrupt Practices Act. Whenever the United States or another foreign governmental authority concludes that we are not in compliance with applicable laws or regulations, such governmental authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issue a recall, impose operating restrictions, enjoin future violations and assess civil penalties against us or our officers or employees, and can recommend criminal prosecution to the Department of Justice. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of any device or product we manufacture or distribute. We are also potentially subject to the UK Bribery Act, which could also lead to the imposition of civil and criminal fines. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition, results of operations and prospects.
International Regulation
International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements
may beare often different.The primary regulatory environment in Europe is that of the European Union and the three additional member states of the European Economic Area (EEA), which have adopted similar laws and regulations with respect to medical devices. The European Union has adopted numerous directives and the European Committee for Standardization has promulgated standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of the relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, may be commercially distributed throughout the member states of the EEA.
The method of assessing conformity to applicable standards and directives depends on the type and class of the product, but normally involves a combination of
self-assessmentself‑assessment by the manufacturer and athird-partythird‑party assessment by a notified body, an independent and neutral institution appointed by a European Union member state to conduct the conformity assessment. This relevant assessment may consist of an audit of themanufacturer'smanufacturer’s quality system (currently ISO 13485), provisions of the Medical Devices Directive, and specific testing of themanufacturer'smanufacturer’s device.In September 2002 and February 2005, our and TomoTherapy'sOur facilitiesrespectively,were first awarded the ISO 13485 certificationwhich replaces the ISO 9001in September 2002 andEN 46001 standards, which havehas been subsequently maintained through periodic assessments,in accordance with the expiration dates of the standards,andwe are currently authorized to affix the CE mark to our products, allowing us to sell our products throughout the European Economic Area. The Medical Device Regulation (MDR) comes into effect in the European Union in 2020. We will be required to obtain certification against the MDR to CE mark new products, or make significant changes to existing products.
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We are also currently subject to regulations in Japan. Under the Pharmaceutical Affairs Law in Japan, a
pre-marketpre‑market approval necessary to sell, market and import a product (Shonin),must be obtained from the Ministry of Health, Labor and Welfare (MHLW), for our products. A Japanese distributor received the first government approval to market the CyberKnife System from MHLW in November 1996.In December 2003, weWe receivedapproval from the MHLW to market the CyberKnife System in Japan for clinical applications in the headandneck, and a new distributor, Chiyoda Technology Corporation, was appointed to distribute the CyberKnife System. In June 2008, we received approval from the MHLW to market the CyberKnife System for treatments throughout the body where radiation treatment is indicated. On June 30, 2009, our subsidiary, Accuray Japan KK, became the Marketing Authorization Holder in Japan, which allowed the Company to directly sell our products in Japan. In August 2010, we received Shonin approval from MHLW to market the CyberKnife G4 System to treat tumors non-invasively anywhere in the body, inclusive of head and neck. Hi- Art Co. Ltd., the original distributor for TomoTherapy in Japan, received the Shonin approval from the MHLW to market the TomoTherapy System for use as an integrated system for the planning and delivery of IMR for the treatment of cancer in January 2006. The Shonin was transferred to another distributor, Hitachi Medical Corporation in January 2009. During September 2011, Hitachi Medical Corporation received a Shonin approval for the marketing of the TomoHD model. In July 2012, we took over the Shonins and the service operations of the TomoTherapy Systems in Japan from Hitachi Medical Corporation. In March 2014, we receivedmaintain Shonin approval from MHLW for CyberKnife Treatment Delivery Systems, M6 Seriesas well as thewith InCiseMLC.MLC, TomoTherapy Treatment Delivery Systems, Radixact Treatment DeliverySystems, and associated Precision and iDMS software products.We are subject to additional regulations in other foreign countries, including, but not limited to, Canada, Taiwan, China, Korea, and Russia in order to sell our products. We intend that either we or our distributors will receive any necessary approvals or clearance prior to marketing our products in those international markets.
State Certificate of Need Laws
In some states, a certificate of need or similar regulatory approval is required prior to the acquisition of
high-costhigh‑cost capital items or the provision of new services. These laws generally require appropriate state agency determination of public need and approval prior to the acquisition of such capital items or addition of new services. Certificate of need regulations may preclude our customers from acquiring one of our systems, and from performing stereotactic radiosurgery procedures using one of our systems. Several of our prospective customers currently are involved in appeals of certificate of need determinations. If these appeals are not resolved in favor of these prospective customers, they may be precluded from purchasing and/or performing services using one of our systems. Certificate of need laws are the subject of continuing legislative activity, and a significant increase in the number of states regulating the acquisition and use of one of our systems through certificate of need or similar programs could adversely affect us.Backlog
For a discussion of
the Company'sour fiscal20162019 backlog, please refer to the section entitled“Backlog,”"Backlog,"in Item 7,Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Employees
As of June 30,
2016,2019, we had959947 employees worldwide. None of the employees are represented by a labor union or covered by a collective bargaining agreement. We have never experienced any employment related work stoppages and we believe our relationship with our employees is good.Geographic Information
For financial reporting purposes, net sales and
long-livedlong‑lived assets attributable to significant geographic areas are presented in Note15,16, Segment Disclosure, to the consolidated financial statements, which are incorporated herein by reference.Available Information
Our main corporate website address iswww.accuray.com
www.accuray.com. We make available on this web site, free of charge, copies of our annual reports on Form10-K,10‑K, quarterly reports on Form10-Q,10‑Q, current reports on Form8-K8‑K and our proxy statements, and any amendments to those reports, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission, the SEC. All SEC filings are also available at theSEC'sSEC’s website atwww.sec.gov.www.sec.gov. In addition, the Corporate Governance GuidelinesWe also use our investor relations website as a channel of distribution for important company information. For example, webcasts of our earnings calls and
the charterscertain events we participate in or host with members of theAudit Committee, Compensation Committee, Nominatinginvestment community are on our investor relations website. Additionally, we announce investor information, including news andCorporate Governance Committee,commentary about our business andDisclosure Committeefinancial performance, SEC filings, notices of investor events, and ourBoardpress and earnings releases, on our investor relations website. Investors and others can receive notifications ofDirectors arenew information posted on our investor relations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our corporate governance guidelines, board committee charters, and code of conduct, is also available ontheour investor relationspage of our website.website under the heading “Governance.” The contents of ourweb sitewebsites are notintended to beincorporated by reference into thisreportAnnual Report on Form 10-K or in any other report or document we fileor furnish,with the SEC, and any references to ourweb sitewebsites are intended to be inactive textual references only.25
We operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the other information contained in this Form
10-K,10‑K, the following discussion highlights some of these risks and the possible impact of these factors on our business, financial condition and future results of operations. If any of the following risks actually occur, our business, financial condition or results of operations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks and uncertainties may impact the"forward-looking"“forward‑looking” statements described elsewhere in this Form10-K10‑K and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in"forward- looking"“forward‑ looking” statements.Risks Related to Our Business
If the CyberKnife or TomoTherapy Systems do not achieve widespread market acceptance, we will not be able to generate the revenue necessary to support our business.
Achieving physician, patient, hospital administrator and
third-partythird‑party payor acceptance of the CyberKnife and TomoTherapy Systems as preferred methods of tumor treatment is crucial to our continued success. Physicians will not begin to use or increase the use of the CyberKnife or TomoTherapy Systems unless they determine, based on experience, clinical data and other factors, that the CyberKnife and TomoTherapy Systems are safe and effective alternatives to traditional treatment methods. Further, physicians may be slow to adopt new or updated versions of our CyberKnife and TomoTherapy Systems because of the perceived liability risks arising from the use of new products and the uncertainty of reimbursement from third-party payors, particularly in light of ongoing health care reform initiatives and the evolving U.S. health care environment.We often need to educate physicians about the use of stereotactic radiosurgery, IGRT and adaptive radiation therapy, convince healthcare payors that the benefits of the CyberKnife and TomoTherapy Systems and their related treatment processes outweigh their costs, and help train qualified physicians in the skilled use of these systems. In addition, we also must educate prospective customers regarding the entire functionality of our radiation therapy systems and their relative benefits compared to alternative products and treatment methods. We must also increase awareness among potential patients, who are increasingly educated about treatment options and therefore impact adoption of new technologies by clinicians. We have expended and will continue to expend significant resources on marketing and educational efforts to create awareness of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRT generally and to encourage the acceptance and adoption of our products for these technologies. We cannot be sure that our products will gain significant market acceptance among physicians, patients and healthcare payors, even if we spend significant time and expense on their education.
In addition, the CyberKnife and TomoTherapy Systems are major capital purchases, and purchase decisions are greatly influenced by hospital administrators who are subject to increasing pressures to reduce costs. These and other factors, including the following, may affect the rate and level of market acceptance of each of the CyberKnife and TomoTherapy Systems:
•the CyberKnife and TomoTherapy
Systems'Systems’ price relative to other products or competing treatments;•our ability to develop new products and enhancements and receive regulatory clearances and approval, if required, to
existingproducts in a timely manner;•increased scrutiny by state boards when evaluating certificates of need requested by purchasing institutions;
•perception by patients, physicians and other members of the healthcare community of the CyberKnife and TomoTherapy
Systems'Systems’ safety, efficacy, efficiency and benefits compared to competing technologies or treatments;•willingness of physicians to adopt new techniques and the ability of physicians to acquire the skills necessary to operate the CyberKnife and TomoTherapy Systems;•26
•
willingness of physicians to adopt new techniques and the ability of physicians to acquire the skills necessary to operate the CyberKnife and TomoTherapy Systems;
extent of
third-partythird‑party coverage and reimbursement rates, particularly from Medicare, for procedures using the CyberKnife and TomoTherapy Systems; and•development of new products and technologies by our competitors or new treatment alternatives.
If the CyberKnife or TomoTherapy Systems are unable to achieve or maintain market acceptance, new orders and sales of our systems would be adversely affected, our revenue levels would decrease and our business would be harmed.
We have a large accumulated deficit, may incur future losses and may be unableOur ability to achieveprofitability.profitability depends in part on maintaining or increasing our gross margins on product sales and services, which we may not be able to achieve.As of June 30,
2016,2019, we had an accumulated deficit of$420.8$485.5 million. We may incur net losses in the future, particularly aswe improve ourselling and marketingactivities.activities increase ahead of any expected revenue. Our ability to achieve and sustainlong-termlong‑term profitability is largely dependent on our ability to successfully market and sell the CyberKnife and TomoTherapy Systems, control our costs, and effectively manage our growth. We cannot assure you that we will be able to achieveprofitability.profitability and even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. In the event we fail to achieve profitability, our stock price could decline.If we do not effectively manage our growth, our business may be significantly harmed.In order to implement our business strategy, we expect continued growth in our infrastructure requirements, particularly as we expand our manufacturing capacities and our sales and marketing capabilities. To manage our growth, we must expand our facilities, augment our management, operational and financial systems, hire and train additional qualified personnel, scale-up our manufacturing capacity and expand our marketing and distribution capabilities. Our manufacturing, assembly and installation process is complex and occurs over many months, and we must effectively scale this entire process to satisfy customer expectations and changes in demand. Further, to accommodate our growth and compete effectively, we will be required to improve our information systems. We cannot be certain that our personnel, systems, procedures and internal controls will be adequate to support our future operations. If we cannot manage our growth effectively, our business will suffer.Our ability to achieve profitability also depends
in partonmaintainingour ability to maintain orincreasingincrease our gross margins on product sales andservices, which we may not be able to achieve.services. A number of factors may adversely impact
oursuch gross margins,on product sales and services,including:•lower than expected manufacturing yields of high cost components leading to increased manufacturing costs;
•low production volume which will result in high levels of overhead cost per unit of production;
•our ability to recognize revenue from our sales and the timing of revenue recognition and revenue deferrals;
•increased material or labor costs;
•increased inventory costs and liabilities for excess inventory resulting from inventory held in excess of forecasted demand;
increased service or warranty costs or the failure to reduce service or warranty costs;
•increased price competition;
•variation in the margins across products installed in a particular period;
changes to U.S. and
•- foreign trade policies, including enactments of tariffs on goods imported into the U.S. and any retaliatory tariffs imposed by other countries on U.S. goods, including our products; and
how well we execute on our strategic and operating plans.
If we are unable to maintain or increase our gross margins on product sales and service, our results of operations could be adversely impacted, we may not achieve profitability and our stock price could decline.
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We have outstanding indebtedness in the form of our 3.75% Convertible Notes, Revolving Credit Facility and Term Loan and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
In August 2017, we issued $85.0 million aggregate principal amount of our 3.75% Convertible Senior Notes due 2022 (the “3.75% Convertible Notes”). As our debt matures, we anticipate having to expend significant resources to either repay or refinance the 3.75% Convertible Notes. For example, in August 2017, in connection with the issuance of the 3.75% Convertible Notes, we (i) exchanged approximately $47.0 million aggregate principal amount of our then-outstanding 3.50% Convertible Senior Notes due 2018 and 3.50% Series A Convertible Senior Notes due 2018 (collectively, the “Existing Notes”) for $53.0 million aggregate principal amount of 3.75% Convertible Notes and (ii) repurchased approximately $28.0 million of Existing Notes. If we decide to refinance the 3.75% Convertible Notes in the future, we may be required to do so on different or less favorable terms or we may be unable to refinance the 3.75% Convertible Notes at all, both of which may adversely affect our financial condition.
In June 2017, we entered into a credit and security agreement that provided us with an initial revolving credit facility (the “Revolving Credit Facility”) of $52.0 million, which was amended in December 2017 to reduce the Revolving Credit Facility to $32.0 million. In December 2017, we also entered into a credit and security agreement that provides for an initial term loan of $40.0 million with a second tranche of $20.0 million available for draw until December 31, 2018 if specified conditions are met (the “Term Loan” and, together with the Revolving Credit Facility, the “Credit Facilities”). In July 2018, we further amended the credit and security agreements with respect to the Credit Facilities to provide for, among other things, adjustments to the Fixed Charge Coverage Ratio. The credit and security agreements with respect to the Credit Facilities were further amended in December 2018, to, among other things, provide a mechanism for determining an alternative interest rate to replace LIBOR for the Credit Facilities, allow the second tranche of the Term Loan to be drawn in two separate advances and extend the availability of the second tranche of the Term Loan from December 31, 2018 until June 30, 2019, all subject to certain specified conditions being met. A further amendment to the credit and security agreements for the Credit Facilities was made in May 2019 to, among other things, decrease the applicable margin for the Credit Facilities, extend the Commitment Expiry Date (as defined in the applicable credit and security agreement) to May 30, 2024, increase the second tranche commitment under the Term Loan by $461,166 and consolidate both tranches of the Term Loan into a single term loan.
As of June 30, 2019, we had total consolidated liabilities of approximately $388.3 million; including long-term liability components of the 3.75% Convertible Notes of $72.7 million, and the Revolving Credit Facility of $28.3 million and the Term Loan of $58.8 million. Our existing and future levels of indebtedness could have important consequences to stockholders and note holders and may adversely affect our financial conditions and future financial results by, among other things:
affecting our ability to satisfy our obligations under the 3.75% Convertible Notes and Credit Facilities;
requiring a substantial portion of our cash flows from operations to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;
impairing our ability to obtain additional financing in the future;
limiting our flexibility in planning for, or reacting to, changes in our business and industry; and
increasing our vulnerability to downturns in our business, our industry or the economy in general.
The credit and security agreements governing the Credit Facilities also includes certain restrictive covenants that limit, among other things, our ability and our subsidiaries’ ability to (i) incur indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their assets, (v) make certain loans or investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain indebtedness and (viii) enter into transactions with affiliates, in each case subject to certain exceptions. In addition, the such agreements require us to meet certain financial covenants, including a “Fixed Charge Coverage Ratio” and minimum consolidated “Net Revenue,” both as defined in the applicable credit and security agreement governing the Credit Facilities. These restrictions could adversely affect our ability to finance our future operations or capital needs, withstand a future downturn in our
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business or the economy in general, engage in business activities, including future opportunities that may be in our interest, and plan for or react to market conditions or otherwise execute our business strategies. Our ability to comply with the covenants and other terms governing the Credit Facilities will depend in part on our future operating performance. If we fail to comply with such covenants and terms, we may be in default and the maturity of the related debt could be accelerated and become immediately due and payable. In addition, because our assets are pledged as a security under the Credit Facilities, if we are not able to cure any default or repay outstanding borrowings, our assets are subject to the risk of foreclosure by our lenders. From time to time to we may not be in compliance with such covenants or other terms governing the Credit Facilities and we may be required to obtain waivers or amendments to the applicable credit and security agreement from our lenders in order to maintain compliance and there can be no certainty that any such waiver or amendment will be available, or what the cost of such waiver or amendment, if obtained, would be. If we are unable to obtain necessary waivers and the debt under such credit facility is accelerated, we would be required to obtain replacement financing at prevailing market rates. Additionally, a default on indebtedness could result in a default under the terms of the indenture governing our 3.75% Convertible Notes. There is no guarantee that we would be able to satisfy our obligations if any of our indebtedness is accelerated.
Our operating results, including our quarterly orders, revenues and margins fluctuate from quarter to quarter and may be unpredictable, which may result in a decline in our stock price.
We have experienced and expect in the future to experience fluctuations in our operating results, including gross orders, revenues and margins, from period to period. Drivers of orders include the introduction and timing of
announcement ofnewproductsproduct or productenhancementsenhancement announcements by us and our competitors, the timing of regulatory approvals, changes in price by us and our competitors as well as changes or anticipated changes inthird-partythird‑party reimbursement amounts or policies applicable to treatments using our products. The availability of economic stimulus packages or other government funding, or reductions thereof, may also affect timing of customer purchases. Our products have a high unit price and require significant capital expenditures by our customers. Accordingly, we experience long sales and implementation cycles, which is of greater concern duringthe currenta volatile economic environment where we have had customersdelayingdelay orcancellingcancel orders.WhenThe timing of when orders are placed, when installation, delivery or shipping, as applicable, is accomplished andthe revenueswhen revenue is recognized affect our quarterly results. Further, because of the high unit price of the CyberKnife and TomoTherapy Systems and the relatively small number of units sold or installed each quarter, each sale or installation of a CyberKnife or TomoTherapy System can represent a significant percentage of our net orders, backlog or revenue for a particularquarter.quarter and shifts in sales or installation from one quarter to another may have significant effects. For example, multi-system sales or sales involving negotiations with integrated delivery networks involve additional complexities to the transaction and require a longer timeline to finalize the sale, which make it more difficult to predict the quarter in which the sale will occur.Once orders are received and booked into backlog,
factorsthere is a risk that we may not recognize revenue in the near term or at all. Factors that may affect whether these orders become revenue (or are cancelled or deemedaged-outaged‑out and reflected as a reduction in net orders) and the timing of revenue include:•economic or political instability in foreign countries;
delays in the customer obtaining or inability of a customer to obtain funding or financing;
•delays in construction at the customer
site; or•- site and delays in installation;
delays in the customer obtaining
receiptor inability of such customer to obtain local or foreign regulatory approvals such as certificates ofneed.need in certain states or Class A or Class B user licenses in China;Our operating results may also be affected by a number of other factors some of which are outside of our control, including:•- timing of when we are able to recognize revenue associated with sales of the CyberKnife and TomoTherapy Systems, which varies depending upon the terms of the applicable sales and service contracts;
the proportion of revenue attributable to orders placed by our distributors which may be more difficult to forecast due to factors outside our control.
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TableOur operating results may also be affected by a number ofContentsother factors some of which are outside of our control, including:•the proportion of revenue attributable to our legacy service plans;
•timing and level of expenditures associated with new product development activities;
•regulatory requirements in some states for a certificate of need prior to the installation of a radiation
device;•- device or foreign regulatory approvals, such as Class A or Class B user licenses in China;
delays in shipment due, for example, to unanticipated construction delays at customer locations where our products are to be installed, cancellations by customers, natural disasters or labor disturbances;
•delays in our manufacturing processes or unexpected manufacturing difficulties;
•the timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors;
•timing and level of expenditures associated with expansion of sales and marketing activities such as trade shows and our overall
operations;operationsthe timing and
•howlevel of expenditures associated with our financing activities;the effects of foreign currency adjustments;
changes in accounting principles, such as those related to revenue recognition, or in the interpretation or the application thereof; and
fluctuations in our gross margins and the factors that contribute to such fluctuations, as described in
the Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Because many of our operating expenses are based on anticipated sales and a high percentage of these expenses are fixed for the short term, a small variation in the timing of revenue recognition can cause significant variations in operating results from quarter to quarter. Our overall gross margins are impacted by a number of factors described in our risk factor entitled
"Our“Our ability to achieve profitability depends in part on maintaining or increasing our gross margins on product sales and services, which we may not be able to achieve."” If our financial results fall below the expectation of securities analysts and investors, the trading price of our common stock would almost certainly decline.We report our orders and backlog on a quarterly and annual
basis our orders and backlog.basis. Unlike revenues, orders and backlog are not defined by U.S. GAAP, and are not within the scope of the audit conducted by our independent registered public accountingfirm; therefore, investors should not interpret our orders or backlog in such a manner.firm. Also, for the reasons discussed inManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, our orders and backlog cannot necessarily be relied upon as accurate predictors of future revenues. Order cancellation or significant delays in installation date will reduce our backlog and future revenues, and we cannot predict if or when orders will mature into revenues. Particularly high levels of cancellations orage-outsage‑outs in one or more periods may cause our revenue and gross margins to decline in current or future periods and will make it difficult to compare our operating results from quarter to quarter.If we encounter manufacturing problems, or if our manufacturing facilities do not continue to meet federal, state or foreign manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations, which would result in delays and lost revenue.The CyberKnife and TomoTherapy Systems are complex, and require the integration of a number of components from several sources of supply. We must manufacture and assemble these complex systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Our linear accelerator components are extremely complex devices and require significant expertise to manufacture, and we may encounter difficulties in scaling up production of the CyberKnife or TomoTherapy Systems, including problems with quality control and assurance, component supply shortages, increased costs, shortages of qualified personnel, the long lead time required to develop additional radiation-shielded facilities for purposes of testing our products and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. If our manufacturing capacity does not keep pace with product demand, we will not be able to fulfill orders in a timely manner, which in turn may have a negative effect on our financial results and overall business.Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adversely affect our financial results.In October 2012, we introduced our new CyberKnife M6 Series Systems. We now offer the option of a fixed collimator, Iris Variable Aperture Collimator, and/or InCise MLC. The initial supplier producing the MLC for our CyberKnife M6 Series Systems experienced low manufacturing yields and initially delivered only a small number of units. Our initial life-cycle testing revealed that the units did not have the durability that we, and our customers, expected in our products. As a result of these durability concerns and the complexity of the MLC we conducted internal testing and evaluation of the MLC in the field, prior to commercially releasing the InCise MLC to our customers. Despite the delay in the launch of the InCise MLC upgrade, we continued to book orders and install the CyberKnife M6 Series Systems with fixed and Iris collimators and now are in the process of fulfilling such orders as capacity permits. The occurrence of new manufacturing and supply issues related to the InCise MLC for our CyberKnife System may adversely affect market acceptance of our CyberKnife M6 System and negatively impact our revenue and overall business.Our manufacturing processes and the manufacturing processes of our third-party suppliers are required to comply with the FDA's QSR for any products imported into, or sold within, the USA. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, production process and controls, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality requirements. We are also subject to state licensing and other requirements and licenses applicable to manufacturers of medical devices, and we are required to comply with ISO, quality system standards in order to produce products for sale in Europe and Canada, as well as various other foreign laws and regulations. Because our manufacturing processes include the production of diagnostic and therapeutic X-ray equipment and laser equipment, we are subject to the electronic product radiation control provisions of the Federal Food, Drug and Cosmetic Act, which requires that we file reports with the FDA, applicable states and our customers regarding the distribution, manufacturing and installation of these types of equipment. The FDA enforces the QSR and the electronic product radiation control provisions through periodic inspections, some of which may be unannounced. We have been, and anticipate in the future being subject to such inspections. FDA inspections usually occur every two to three years. During such inspections, the FDA may issue Inspectional Observations on Form FDA 483, listing instances where the manufacturer has failed to comply with applicable regulations and procedures, or warning letters. Our Sunnyvale facility, where we manufacture the CyberKnife Systems, was most recently inspected by the FDA in June 2015. The June 2015 inspection resulted in no observations. In addition, our Madison facility, where we manufacture the finished TomoTherapy and CyberKnife Systems, was most recently inspected by the FDA in July 2012. The July 2012 inspection resulted in no observations.If a manufacturer does not adequately address the observations, the FDA may take enforcement action against the manufacturer, including the imposition of fines, restriction of the ability to export product, total shutdown of production facilities and criminal prosecution. If we or a third-party supplier receive a Form FDA 483 with material or major observations that are not promptly corrected, fail to pass a QSR inspection, or fail to comply with these, ISO and other applicable regulatory requirements, our operations could be disrupted and our ability to generate sales could be delayed. Our failure to take prompt and satisfactory corrective action in response to an adverse inspection or our failure to comply with applicable standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, which would cause our sales and business to suffer. In addition, because some foreign regulatory approvals are based on approvals or clearances from the FDA, any failure to comply with FDA requirements may also disrupt our sales of products in other countries.We cannot assure you thatthe FDA or other governmental authorities would agree withourinterpretation of applicable regulatory requirements or that we or our third-party suppliers havebacklog will result inall instances fully complied with allapplicable requirements. If any of these events occurs, our reputation could be harmed, we could lose customers and there could be a material adverse effect on our business, financial condition and results of operations.If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we could outsource needed production or enter into licensing or other third-party arrangements, this could reduce our gross margin and expose us to the risks inherent in relying on others. We also cannot assure you that our suppliers will deliver an adequate supply of required componentsrevenue on a timely basis or at all, or thattheyany cancelled contracts willadequately comply with the QSR. Failure to obtain these components on a timely basis would disrupt our manufacturing processes and increase our costs, which would harm our operating results.be replaced.30
Our industry is subject to intense competition and rapid technological change, which may result in products or new tumor treatments that are superior to the CyberKnife and TomoTherapy Systems. If we are unable to anticipate or keep pace with changes in the marketplace and the direction of technological innovation and customer demands, our products may become obsolete or less useful and our operating results will suffer.
The medical device industry in general and the
non-invasivenon‑invasive cancer treatment field in particular are subject to intense and increasing competition and rapidly evolving technologies. Because our products often have long development and government approval cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to continue to demonstrate the advantages of our products and technologies overwell-establishedwell‑established alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. Traditional surgery and other forms of minimally invasive procedures, brachytherapy, chemotherapy or other drugs remain alternatives to the CyberKnife and TomoTherapy Systems.We consider the competition for the CyberKnife and TomoTherapy Systems to be existing radiation therapy systems, primarily using
C-armC‑arm linacs, which are sold by large,well-capitalizedwell‑capitalized companies with significantly greater market share and resources than we have. Several of these competitors are also able to leverage their fixed sales, service and other costs over multiple products or product lines. In particular, we compete with a number of existing radiation therapy equipment companies, including Varian, Elekta,Mitsubishi,BrainLAB and ViewRay. Varian has been the leader in the external beam radiation therapy market for many years and has the majority market share for radiation therapy systems worldwide. In general, because of aging demographics and attractive market factors in oncology, we believe that new competitors will enter the radiosurgery and radiation therapy markets in the years ahead.The CyberKnife System has not typically been used to perform traditional radiation therapy and therefore competition has been limited with conventional medical linacs that perform traditional radiation therapy. However, the CyberKnife VSI System, which we introducedFor example, Varian announced inNovember of 2009, may be used to perform Robotic IMRT, an advanced method of traditional radiation therapy, which products of Elekta and Varian are also capable of performing. The CyberKnife M6 Series, which we introduced in October2012now includes the option of an InCise MLC which may further the use of the CyberKnife Systems to perform radiation therapy. In October 2012, Varian announceda new line ofC-armC‑arm gantries, called the Edge systems, which Varian claims are specifically designed for radiosurgery to compete with our CyberKnife Systems. In addition, some manufacturers of conventional linac based radiation therapy systems, including Varian and Elekta, have products that can be used in combination with body and/or head frames and image guidance systems to perform both radiosurgical and radiotherapy procedures.Table of ContentsIn May 2017, Varian launched a new radiation therapy product called Halcyon which they have positioned against our TomoTherapy product line.Furthermore, many government, academic and business entities are investing substantial resources in research and development of cancer treatments, including surgical approaches, radiation treatment,
MRI-guidedMRI‑guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy (which is the treatment of disease by replacing, manipulating, or supplementing nonfunctional genes), and other approaches. Successful developments that result in new approaches for the treatment of cancer could reduce the attractiveness of our products or render them obsolete.Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapid technological development may render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have or may have greater corporate, financial, operational, sales and marketing resources, and more experience and resources in research and development than we have. We cannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or that would render our technologies and products obsolete or less useful. We may not have the financial resources, technical expertise, marketing, distribution or support capabilities to compete successfully in the future. In addition, some of our competitors may compete by changing their pricing model or by lowering the price of their products. If we are unable to maintain or increase our selling prices, our revenue and gross margins may suffer. Our success will depend in large part on our ability to maintain a competitive position with our technologies.
If we are unable to develop new products or enhance existing products, we may be unable to attract or retain customers.31Our success depends on the successful development, regulatory clearance or approval, introduction and commercialization of new generations of products, treatment systems, and enhancements to and/or simplification of existing products. The CyberKnife and TomoTherapy Systems, which are currently our principal products, are technologically complex and must keep pace with, among other things, the products of our competitors and new technologies. We are making significant investments in long-term growth initiatives. Such initiatives require significant capital commitments, involvement of senior management and other investments on our part, which we may be unable to recover. Our timeline for the development of new products or enhancements may not be achieved and price and profitability targets may not prove feasible. Commercialization of new products may prove challenging, and we may be required to invest more time and money than expected to successfully introduce them. Once introduced, new products may adversely impact orders and sales of our existing products, or make them less desirable or even obsolete. Compliance with regulations, competitive alternatives, and shifting market preferences may also impact the successful implementation of new products or enhancements.Our ability to successfully develop and introduce new products, treatment systems and product enhancements and simplifications, and the revenues and costs associated with these efforts, will be affected by our ability to:•properly identify and address customer needs;•prove feasibility of new products in a timely manner;•educate physicians about the use of new products and procedures;•comply with internal quality assurance systems and processes timely and efficiently;•limit the timing and cost of obtaining regulatory approvals or clearances;•accurately predict and control costs associated with inventory overruns caused by phase-in of new products and phase-out of old products;•price new products competitively;
•manufacture and deliver our products in sufficient volumes on time, and accurately predict and control costs associated with manufacturing, installation, warranty and maintenance of the products;•meet our product development plan and launch timelines;•improve manufacturing yields of components; and•manage customer demands for retrofits of both old and new products.
Even if customers accept new products or product enhancements, the revenues from these products may not be sufficient to offset the significant costs associated with making them available to customers.We cannot be sure that we will be able to successfully develop, obtain regulatory approval or clearance for, manufacture or introduce new products, treatment systems or enhancements, the roll-out of which involves compliance with complex quality assurance processes, including QSR. Failure to obtain regulatory approval or clearance for our products or to complete these processes in a timely and efficient manner could result in delays that could affect our ability to attract and retain customers, or could cause customers to delay or cancel orders, causing our backlog, revenues and operating results to suffer.We could become subject to product liability claims, product recalls, other field actions and warranty claims that could be expensive, divert management's attention and harm our business.Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing and sale of medical device products. We may be held liable if a CyberKnife or TomoTherapy System causes injury or death or is found otherwise unsuitable during usage. Our products incorporate sophisticated components and computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation. Because our products are designed to be used to perform complex surgical and therapeutic procedures involving delivery of radiation to the body, defects, even if small, could result in a number of complications, some of which could be serious and could harm or kill patients. Any alleged weaknesses in physician training and services associated with our products may result in unsatisfactory patient outcomes and product liability lawsuits. It is also possible that defects in the design, manufacture or labeling of our products might necessitate a product recall or other field corrective action, which may result in warranty claims beyond our expectations and may harm our reputation and create adverse publicity. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. We may also be subject to claims for property damage or economic loss related to, or resulting from, any errors or defects in our products, or the installation, servicing and support of our products, or any professional services rendered in conjunction with our products. The coverage limits of our insurance policies may not be adequate to cover future claims. If sales of our products increase or we suffer future product liability claims, we may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts of coverage. A product liability claim, any product recalls or other field actions or excessive warranty claims, whether arising from defects in design or manufacture or labeling, could negatively affect our sales or require a change in the design, manufacturing process or the indications for which the CyberKnife or TomoTherapy Systems may be used, any of which could harm our reputation and business and result in a decline in revenue.In addition, if a product we designed or manufactured is defective, whether because of design or manufacturing, or labeling defects, improper use of the product or other reasons, we may be required to notify regulatory authorities and/or to recall the product, possibly at our expense. We have voluntarily initiated recalls and product corrections in the past, including one recall for the CyberKnifeSystem in fiscal year 2014. While no serious adverse health consequences have been reported in connection with these recalls and the costs associated with each such recall were not material, we cannot ensure that the FDA will not require that we take additional actions to address problems that resulted in previous recalls. A required notification of a correction or removal to a regulatory authority or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other civil or criminal penalties. The adverse publicity resulting from any of these actions could cause customers to review and potentially terminate their relationships with us. These investigations, corrections or recalls, especially if accompanied by unfavorable publicity, patient injury or termination of customer contracts, could result in incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business.Our reliance on single-source suppliers for critical components of the CyberKnife and TomoTherapy Systems could harm our ability to meet demand for our products in a timely and cost effective manner.We currently depend on single-source suppliers for some of the critical components necessary for the assembly of the CyberKnife and TomoTherapy Systems, including, with respect to the CyberKnife System, the robot and imaging detectors, and, with respect to the TomoTherapy Systems, the ring gantry, the solid state modulator, the radiation detector and the magnetron. If any single-source supplier was to cease delivering components to us or fail to provide the components to our specifications and on a timely basis, we might be required to find alternative sources for these components. In some cases, alternative suppliers may be located in the same geographic area as existing suppliers, and are thus subject to the same economic, political, and geographic factors that may affect existing suppliers to meet our demand. We may have difficulty or be unable to find alternative sources for these components. As a result, we may be unable to meet the demand for the CyberKnife or TomoTherapy Systems, which could harm our ability to generate revenue and damage our reputation. Even if we do find alternate suppliers, we will be required to qualify any such alternate suppliers and we would likely experience a lengthy delay in our manufacturing processes or a cessation in production, which would result in delays of shipment to end users. We cannot assure you that our single-source suppliers will be able or willing to meet our future demands.We generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single-source supplier fails to deliver components on a timely basis. Furthermore, if we are required to change the manufacturer of a critical component of the CyberKnife or TomoTherapy Systems, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements and guidelines, which could further impede our ability to manufacture our products in a timely manner. If the change in manufacturer results in a significant change to the product, a new 510(k) clearance would be necessary, which would likely cause substantial delays. The disruption or termination of the supply of key components for the CyberKnife or TomoTherapy Systems could harm our ability to manufacture our products in a timely manner or within budget, harm our ability to generate revenue, lead to customer dissatisfaction and adversely affect our reputation and results of operations.We depend on key employees, the loss of whom would adversely affect our business. If we fail to attract and retain employees with the expertise required for our business, we may be unable to continue to grow our business.We are highly dependent on the members of our senior management, sales, marketing, operations and research and development staff. Our future success will depend in part on our ability to retain our key employees and to identify, hire and retain additional personnel. Competition for qualified personnel in the medical device industry is intense, and finding and retaining qualified personnel with experience in our industry is very difficult. We believe there are only a limited number of individualswith the requisite skills to serve in many of our key positions and we compete for key personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research institutions. A significant portion of our compensation to our key employees is in the form of stock related grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additional qualified personnel. We do not maintain, and do not currently intend to obtain, key employee life insurance on any of our personnel. If we fail to hire and retain personnel in key positions, we may be unable to continue to grow our business successfully.Disruption of critical information technology systems, infrastructure, and data could harm our business and financial condition.Information technology helps us operate more efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build, sustain and secure the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through a security breach. In addition, we have moved some of our data and information to a cloud computing system, where applications and data are hosted, accessed and processed through a third-party provider over a broadband Internet connection. In a cloud computing environment, we could be subject to outages and security breaches by the third-party service provider. If our data management systems do not effectively collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, computer viruses, security breaches, catastrophic events or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows and the timeliness with which we internally and externally report our operating results.Our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving legal and regulatory standards, the increasing need to protect patient and customer information, and the information technology needs associated with our changing products and services. There can be no assurance that our process of consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, continuing to build security into the design of our products, protecting and enhancing our systems and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.If we are unable to maintain reliable information technology systems and prevent data breaches, we may suffer regulatory consequences in addition to business consequences. Our worldwide operations mean that we are subject to data protection and cyber security laws and regulations in many jurisdictions, and that some of the data we process, store and transmit may be transmitted across countries. In the U.S., HIPAA privacy and security rules require us as a business associate to protect the confidentiality of patient health information, and the Federal Trade Commission has begun to assert authority over protection of privacy and the use of cyber security in information systems. In Europe, the General Data Protection Regulation requires us to manage individually identifiable information in the E.U. and, in the event of violations, may impose significant fines. China and Russia have also passed laws that require individually identifiable data on their citizens to be maintained on local servers and that may restrict transfer or processing of that data. We believe that the ongoing costs and impacts of ensuring compliance with such rules are not material to our business. However, there is no guarantee that we will avoid enforcement actions by governmental bodies. Enforcement actions can be costly and interrupt regular operations of our business. In addition, there has been a developing trend of civil lawsuits and class actions relating to breaches of consumer data held by large companies.While we have not been named in any such suits, if a substantial breach or loss of data from our records were to occur, we could become a target of such litigation.Likewise, data privacy breaches by employees and others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized person or to the public. There can be no assurance that any efforts we make to prevent against such privacy breaches will prevent breakdowns or breaches in our systems that could adversely affect our business. Moreover, we manufacture and sell products that allow our customers to store confidential information about their patients. We do not have measures to secure our customers' equipment or any information stored in our customers' systems or at their locations, which is the responsibility of our customers. A breach of network security and systems or other events that cause the loss or public disclosure of, or access by third parties to, sensitive information stored by us or our customers could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harm to our reputation and brand, and time-consuming and expensive litigation, any of which could have an adverse effect on our financial results.If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our business and our stock price.Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal or unauthorized transactions. If we cannot maintain effective controls and provide reliable financial reports, our business and operating results could be harmed.A failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and operating results and our stock price, and we could be subject to stockholder litigation.We may have difficulties in determining the effectiveness of our internal controls due to our complex financial model.The complexity of our financial model contributes to our need for effective financial reporting systems and internal controls. We recognize revenue from a range of transactions including CyberKnife and TomoTherapy Systems sales and services. The CyberKnife and TomoTherapy Systems are complex products that contain both hardware and software elements. The complexity of the CyberKnife and TomoTherapy Systems and of our financial model pertaining to revenue recognition requires us to process a broader range of financial transactions than would be required by a company with a less complex financial model. Accordingly, deficiencies or weaknesses in our internal controls would likely impact us more significantly than they would impact a company with a less complex financial model. If we were to find that our internal controls were deficient, and/or we would be required to amend or restate historical financial statements, this would likely have a negative impact on our stock price.If third-party payors do not provide sufficient coverage and reimbursement to healthcare providers for use of the CyberKnife and TomoTherapy Systems, demand for our products and our revenue could be adversely affected.Our customers rely significantly on reimbursement from public and private third-party payors for CyberKnife and TomoTherapy systems procedures. Our ability to commercialize our products successfully will depend in significant part on the extent to which public and private third-party payors provide adequate coverage and reimbursement for procedures that are performed with our products.Third-party payors, and in particular managed care organizations, frequently challenge the prices charged for medical products and services and institute cost containment measures to control or significantly influence the purchase of medical products and services. If reimbursement policies or other cost containment measures are instituted in a manner that significantly reduces the coverage or payment for the procedures that are performed with our products, our existing customers may not continue using our products or may decrease their use of our products, and we may have difficulty obtaining new customers. Such actions would likely have a material adverse effect on our operating results.On October 31, 2015, the Centers for Medicare and Medicaid Services (CMS) issued the final rule for 2016 Medicare payment rates for hospital outpatient services, physicians, and services performed in the freestanding center setting. The final rule included certain proposals that impact reimbursement rates for radiation therapy services, such as changes to the equipment utilization assumptions, which have resulted in small changes in reimbursement in the freestanding center setting.While these coding changes were implemented in 2016 they have resulted in no significant differences in reimbursement for services delivered with our products. However, CMS reviews reimbursement rates annually and may implement significant changes in future years, which could discourage existing and potential customers from purchasing or using our products.The safety and efficacy of our products for certain uses is not yet supported by long-term clinical data, and our products may therefore prove to be less safe and effective than initially thought.Although we believe that the CyberKnife and TomoTherapy Systems have advantages over competing products and technologies, we do not have sufficient clinical data demonstrating these advantages for all tumor indications. In addition, we have only limited five-year patient survival rate data, which is a common long-term measure of clinical effectiveness in cancer treatment. We also have limited clinical data directly comparing the effectiveness of the CyberKnife Systems to other competing systems. Future patient studies or clinical experience may indicate that treatment with the CyberKnife System does not improve patient survival or outcomes.Likewise, because the TomoTherapy Systems have only been on the market since 2003, we have limited complication or patient survival rate data with respect to treatment using the system. In addition, while the effectiveness of radiation therapy is well understood, there is a growing but still limited number of peer-reviewed medical journal publications regarding the efficacy of highly conformal treatment such as that delivered by the TomoTherapy System. If future patient studies or clinical experience do not support our beliefs that the TomoTherapy System offers a more advantageous treatment for a wide variety of cancer types, use of the system could fail to increase or could decrease, and our business would therefore be adversely affected.Such results could reduce the rate of reimbursement by both public and private third-party payors for procedures that are performed with our products, slow the adoption of our products by physicians, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable. In addition, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, the FDA could rescind our clearances, our reputation with physicians, patients and others may suffer and we could be subject to significant legal liability.We rely on third parties to perform spare parts shipping and other logistics functions on our behalf. A failure or disruption at our logistics providers would adversely impact our business.Customer service is a critical element of our sales strategy. Third-party logistics providers store most of our spare parts inventory in depots around the world and perform a significant portion of our spare parts logistics and shipping activities. If any of our logistics providers terminates its relationshipwith us, suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, or we have to change and qualify alternative logistics providers for our spare parts, shipments of spare parts to our customers may be delayed and our reputation, business, financial condition and results of operations may be adversely affected.Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling our product.The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. In particular, the field of radiation treatment of cancer is well established and crowded with the intellectual property of competitors and others. We also expect that other participants will enter the field. A number of companies in our market, as well as universities and research institutions, have issued patents and have filed patent applications which relate to the use of radiation therapy and stereotactic radiosurgery to treat cancerous and benign tumors.Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third-party patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that our products and the methods we employ in the use of our products are covered by United States or foreign patents held by them.In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware, and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for less invasive cancer treatment alternatives grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Regardless of the merit of infringement claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise funds, if necessary, to continue our operations.In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual property were upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from selling our products unless we could obtain a license or are able to redesign the product to avoid infringement. Required licenses may not be made available to us on acceptable terms or at all. If we are unable to obtain a license or successfully redesign our system, we might be prevented from selling our system. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or other person, we may be required to pay damages, pay ongoing royalties or otherwise settle such matter upon terms that are unfavorable to us. In these circumstances, we may be unable to sell our products at competitive prices or at all, and our business and operating results could be harmed.We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.As is common in the medical device industry, we employ individuals who were previously employed at other medical equipment or biotechnology companies, including our competitors or potential competitors. We may be subject to claims that we or those employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against claims of this nature, litigation could result in substantial costs and be a distraction to management.It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection.Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products. Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may be unsuccessful in defending our patents and other proprietary rights against third-party challenges. As key patents expire, our ability to prevent competitors from copying our technology may be limited.In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard the technology underlying our products. If these measures do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced. Although we have attempted to obtain patent coverage for our technology where available and appropriate, there are aspects of the technology for which patent coverage was never sought or never received. There are also countries in which we sell or intend to sell the CyberKnife or TomoTherapy Systems but have no patents or pending patent applications. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection. Although we have several issued patents in the United States and in foreign countries protecting aspects of the CyberKnife and TomoTherapy Systems, our pending United States and foreign patent applications may not issue, may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable.Similarly, our issued patents and those of our licensors may not provide us with any competitive advantages. Competitors may be able to design around our patents or develop products which provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management's attention from our core business. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. In addition, we may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially valuable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us.We also license patent and other proprietary rights to aspects of our technology to third parties in fields where we currently do not operate as well as in fields where we currently do operate. Disputes with our licensees may arise regarding the scope and content of these licenses. Further, our ability toexpand into additional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future.The policies we have in place to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge methods and know-how. If we are unable to protect our intellectual property rights, we may be unable to prevent competitors from using our own inventions and intellectual property to compete against us and our business may be harmed.Unfavorable results of legal proceedings could materially and adversely affect our financial condition.We are and may become a party to legal proceedings, claims and other legal matters in the ordinary course of business or otherwise. These legal proceedings, claims and other legal matters, regardless of merit, may be costly, time-consuming and require the attention of key management and other personnel. The outcomes of such matters are uncertain and difficult to predict. If any such matters are adjudicated against us, in whole or in part, we may be subject to substantial monetary damages, disgorgement of profits, and injunctions that prevent us from operating our business, any of which could materially and adversely affect our business and financial condition. We cannot guarantee that our insurance coverage will be sufficient to cover any damages awarded against us.If we are not able to meet the requirements of our license agreement with the Wisconsin Alumni Research Foundation, or WARF, we could lose access to the technologies licensed thereunder and be unable to manufacture, market or sell the TomoTherapy Systems.We license patents from WARF covering the multi-leaf collimator and other key technologies incorporated into the TomoTherapy Systems under a license agreement that requires us to pay royalties to WARF. In addition, the license agreement obligates us to pursue an agreed development plan and to submit periodic reports, and restricts our ability to take actions to defend the licensed patents. WARF has the right to unilaterally terminate the agreement if we do not meet certain minimum royalty obligations or satisfy other obligations related to our utilization of the technology. If WARF terminates the agreement or if we otherwise lose the ability to exploit the licensed patents, our competitive advantage would be reduced and we may not be able to find a source to replace the licensed technology. The license agreement reserves to WARF the initial right to defend or prosecute any claim arising with respect to the licensed technology. If WARF does not vigorously defend the patents, we may be required to engage in expensive patent litigation to enforce our rights, and any competitive advantage we have based on the licensed technology may be hampered. Any of these events could adversely affect our business, financial condition and results of operations.International sales of our products account for a significant portion of our revenue, which exposes us to risks inherent in international operations.
Our international sales, as a percentage of total revenue, have increased over the last five fiscal years. The percentage of our revenue derived from sales outside of the Americas region was 68% in 2019, 64% in 2018, and 60% in
2016, 54% in 2015 and 58% in 2014.2017. To accommodate our international sales, we have invested significant financial and management resources to develop an international infrastructure that will meet the needs of our customers. We anticipate that a significant portion of our revenue will continue to be derived from sales of our products in foreign markets and that the percentage of our overall revenuethat is derived from these markets may continue to increase. This revenue and related operations will therefore continue to be subject to the risks associated with international operations, including:
•economic or political instability in foreign countries, including the market
volitlity caused byvolatility resulting from therecent approval by voters inpending United Kingdom (the “UK”) exit from theU.K. of a referendum to leave the EU;•- European Union (the “EU”), or Brexit;
import delays;
•changes in foreign regulatory laws governing, among other matters, the clearance, approval and sales of medical devices;
•the potential failure to comply with foreign regulatory requirements to sell and market our products;
•longer payment cycles associated with many customers outside the United States;
•inability of customers to obtain requisite government approvals, such as customers in China, including customers of our recently announced joint venture, obtaining one of the limited number of Class A or Class B user licenses available in order to purchase our products;
effective compliance with privacy, data protection and information security laws, such as the European Union General Data Protection Regulation (“GDPR”);
adequate coverage and reimbursement for the CyberKnife and TomoTherapy treatment procedures outside the United States;
•failure of local laws to provide the same degree of protection against infringement of our intellectual property;
•protectionist laws and business practices that favor local competitors;
•U.S. trade and economic sanctions policies that are in effect from time to time and the possibility that foreign countries may impose additional taxes, tariffs or other restrictions on foreign trade;
•trade restrictions that are in effect from time to time, including U.S. prohibitions and restrictions on exports of certain products and technologies to certain nations and customers;
the unfamiliarity of shipping companies and other logistics providers with U.S. export control laws, which may lead to their unwillingness to ship or delays in shipping, our products to certain nations and customers despite such shipments being permitted under such laws;
U.S. relations with the governments of the foreign countries in which we operate;
the inability to obtain required export or import licenses or approvals;
risks relating to foreign currency, including fluctuations in foreign currency exchange rates possibly causing fewer sales due to the strengthening of the U.S. Dollar; and
•contractual provisions governed by foreign
laws and various trade restrictions, including U.S. prohibitions and restrictions on exports of certain products and technologies to certain nations.laws.32
Our inability to overcome these obstacles could harm our business, financial condition and operating results. Even if we are successful in managing these obstacles, our partners internationally are subject to these same risks and may not be able to manage these obstacles effectively.
In addition, future imposition of, or significant increases in, the level of customs duties, export quotas, regulatory restrictions, trade restrictions, or trade
restrictionsprohibitions could materially harm our business.Enhanced international tariffs, including tariffs imposed by the United States and China that affect our products or components within our products, other trade barriers or a global trade war could increase our costs and materially and adversely affect our business operations and financial condition.
Our global business could be negatively affected by trade barriers and other governmental protectionist measures, any of which can be imposed suddenly and unpredictably. There is currently significant uncertainty about the future relationship between the U.S. and various other countries, most significantly China, with respect to trade policies, treaties, government regulations and tariffs.
Since the beginning of 2018, there has been increasing public threats and, in some cases, legislative or executive action, from U.S. and foreign leaders regarding instituting tariffs against foreign imports of certain materials. During the last half of calendar year 2018, the federal government imposed a series of tariffs ranging from 10% to 25% on a variety of imports from China. These tariffs affect certain components, including the linear accelerator for our CyberKnife Systems, which we manufacture in China and import into the U.S., as well as other components that we import into the U.S. from our suppliers. China has responded to these tariffs with retaliatory tariffs ranging from 5% to 25% on a wide range of products from the U.S., which include certain of our products. Higher duties on existing tariffs and further rounds of tariffs have been announced or threatened by the U.S. and Chinese leaders. Additionally, the U.S. has threatened to impose tariffs on goods imported from other countries, which could also impact our or our customers’ operations. If these tariffs continue, if additional tariffs are placed on certain of our components or products, or if any related counter-measures are taken by China, the U.S. or other countries, our business, financial condition and results of operations may be materially harmed. The imposition of tariffs could also increase our costs and require us to raise prices on our products, which may negatively impact the demand for our products in the affected market. If we are not successful in offsetting the impact of any such tariffs, our revenue, gross margins and operating results may be adversely affected.
These tariffs are subject to a number of uncertainties as they are implemented, including future adjustments and changes. The ultimate reaction of other countries and the impact of these tariffs or other actions on the U.S., China, the global economy and our business, financial condition and results of operations, cannot be predicted at this time, nor can we predict the impact of any other developments with respect to global trade. Further, the imposition of additional tariffs by the U.S. could result in the adoption of additional tariffs by China and other countries, as well as further retaliatory actions by any affected country. Any resulting trade war could negatively impact the global market for medical devices, including radiation therapy devices, and could have a significant adverse effect on our business. These developments may have a material adverse effect on global economic conditions and the stability of global financial markets, and they may significantly reduce global trade and, in particular, trade between China and the U.S. Any of these factors could depress economic activity, restrict our access to customers and have a material adverse effect on our business, financial condition and results of operations.
We face risks related to the current global economic environment, which could
systems.delayadversely affect our business, financial condition and results of operations by, among other things, delaying orpreventpreventing our customers from obtaining financing to purchase the CyberKnife and TomoTherapy Systems and implement the required facilitieswhich would adversely affectto house ourbusiness, financial condition and results of operations.Our business and results of operations are materially affected by conditions in the global
capitalmarkets and the economy generally.A general economic slowdown and the volatility in current economic conditions could adversely affect our business including our ability to raise financing.Concerns over thesloweconomicrecovery,stability, the level of U.S. national debt, currency fluctuations and volatility, the rate of growth ofJapna,Japan, China, and other Asian economies, unemployment, the availability and cost of credit,the U.S. housing market,inflation levels,negative interest rates,trade relations, energy costs and geopoliticalissuesuncertainty have contributed to increased volatility and diminished expectations for the economy and the markets.33
Further, the U.S. federal government has called for, or enacted, substantial changes to healthcare, trade, fiscal, and tax policies, which may include changes to existing trade agreements and may have a significant impact on our operations. For example, the current administration has initiated the imposition of tariffs on certain foreign products, including from China, that have resulted in and may result in future retaliatory tariffs on U.S. goods and products. We cannot predict the impact, if any, that these changes could have on our business. If economic conditions worsen or new legislation is passed related to the healthcare system, trade, fiscal or tax policies, customer demand may not materialize to levels we require to achieve our anticipated financial results, which could have a material adverse effect on our business, financial condition and results of operations.
Additionally, uncertain credit markets and concerns regarding the availability of credit
pose a risk thatcould impact consumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. If the current situation continues to deteriorate or does not improve, our business could benegatively affected
includingby factors such as reduced demand for our products resulting from aslow-downslow‑down or volatility in the general economy, supplier or customer disruptions and/or temporary interruptions in our ability to conductday-to-dayday‑to‑day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers. For example, in the United States, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for their purchases of the CyberKnife or TomoTherapy Systems. In addition, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for the construction or renovation of facilities to house CyberKnife or TomoTherapy Systems, the cost of which can be substantial. These delays have in some instances led to our customers postponing the shipment and installation of previously ordered systems or cancelling their system orders, and may cause other customers to postpone their system installation or to cancel their agreements with us. An increase in delays and order cancellations of this nature would adversely affect our product sales, backlog and revenues, and therefore harm our business and results of operations. In addition, the recent approval by voters in the U.K. of a referendum to leave the EU (often referred to as Brexit), and the ongoing uncertainty regarding the timing and terms of Brexit, has caused, and may continue to cause, uncertainty in the global markets. TheU.K.'s proposed exitrisks related to Brexit are discussed in more detail in our risk factor entitled “The decision of the United Kingdom to withdraw from the European Union may have a negative effect on global economic conditions, financial markets and our operations.”The decision of the United Kingdom to withdraw from the European Union may have a negative effect on global economic conditions, financial markets and our operations.
In June 2016, a majority of voters in the UK voted in favor of Brexit in a national referendum. As of the date of this filing, the British Parliament has not agreed upon the terms of the withdrawal. On April 10, 2019, the leaders of the other member countries of the European Union agreed to extend the deadline for Brexit until October 31, 2019. The referendum and ongoing negotiations have created significant uncertainty about the future relationship between the UK and the EU.
The pending implementation of Brexit has caused, and may continue to cause, uncertainty in the global markets. The effects of Brexit will also depend on any agreements the UK reaches to retain access to EU
ifmarkets either during a transitional period or more permanently. There is significant uncertainty about the future relationship between the UK and the EU, including with respect to the laws and regulations that will apply as the UK determines which EU laws to replace or replicate in the event of a withdrawal, including those governing manufacturing, labor, environmental, data protection/privacy, competition, medical sales and advertising and other matters applicable to the medical device industry. If the UK leaves the EU with no agreement, it will likely have an adverse impact on labor and trade and will create further short-term currency volatility. In the absence of a future trade deal, the UK’s trade with the EU and the rest of the world would be subject to tariffs and duties set by the World Trade Organization, which could result in higher importation costs for our products. In addition, the movement of goods between the UK and the remaining member states of the EU will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. Moreover, currency volatility could drive a weaker pound which could result in a decrease in the profitability of our sales in the UK. Any adjustments we make to our business and operations as a result of Brexit could result in significant expense and take significant time to complete.While we have not experienced any material financial impact from Brexit on sales within the UK to date, we cannot predict its future implications. If implemented, Brexit will take some period of time to complete and could result in
regulatorychanges that impact ourbusiness.business, including potentially requiring us to obtain new registrations for our products that are sold into the UK. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory and other negotiations the UK conducts. Wewillcontinue to monitor and review the impact of any resulting changes to EU orU.K.UK law that could affect our operations.34
If we encounter manufacturing problems, or if our manufacturing facilities do not continue to meet federal, state or foreign manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations,
such as labor policies,which would result in delays and lost revenue.The CyberKnife and TomoTherapy Systems are complex and require the integration of a number of components from several sources of supply. We must manufacture and assemble these complex systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Our linear accelerator components are extremely complex devices and require significant expertise to manufacture, and we may encounter difficulties in scaling up production of the CyberKnife or TomoTherapy Systems, including problems with quality control and assurance, component supply shortages, increased costs, shortages of qualified personnel, the long lead time required to develop additional radiation‑shielded facilities for purposes of testing our products and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. If our manufacturing capacity does not keep pace with product demand, we will not be able to fulfill orders in a timely manner, which in turn may have a negative effect on our financial
planning, productresults and overall business. Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adversely affect our financial results.Our manufacturing processes and
product distribution. Politicalthe manufacturing processes of our third‑party suppliers are required to comply with the FDA’s QSR for any products imported into, or sold within, the U.S. The QSR is a complex regulatory scheme that covers the methods andregulatory responsesdocumentation of the design, testing, production process and controls, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Furthermore, we are required tothe voteverify that our suppliers maintain facilities, procedures and operations that comply with our quality requirements. We arestill developingalso subject to state licensing and other requirements and licenses applicable to manufacturers of medical devices, and we are required to comply with ISO, quality system standards in order to produce products for sale in Europe and Canada, as well as various other foreign laws and regulations. Because our manufacturing processes include the production of diagnostic and therapeutic X‑ray equipment and laser equipment, we are subject to the electronic product radiation control provisions of the Federal Food, Drug and Cosmetic Act, which requires that we file reports with the FDA, applicable states and our customers regarding the distribution, manufacturing and installation of these types of equipment. The FDA enforces the QSR and the electronic product radiation control provisions through periodic inspections, some of which may be unannounced. We have been, and anticipate in theprocessfuture being subject to such inspections. FDA inspections usually occur every two to three years. During such inspections, the FDA may issue Inspectional Observations on Form FDA 483, listing instances where the manufacturer has failed to comply with applicable regulations and procedures, or warning letters.If a manufacturer does not adequately address the observations, the FDA may take enforcement action against the manufacturer, including the imposition of
assessingfines, restriction of theimpactability to export product, total shutdown of production facilities and criminal prosecution. If we or a third‑party supplier receive a Form FDA 483 with material or major observations that are not promptly corrected, fail to pass a QSR inspection, or fail to comply with these, ISO and other applicable regulatory requirements, our operations could be disrupted and our ability to generate sales could be delayed. Our failure to take prompt and satisfactory corrective action in response to an adverse inspection or our failure to comply with applicable standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, which would cause our sales and business to suffer. In addition, because some foreign regulatory approvals are based on approvals or clearances from thevoteFDA, any failure to comply with FDA requirements may also disrupt our sales of products in other countries. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we or our third‑party suppliers have in all instances fully complied with all applicable requirements. If any of these events occur, our reputation could be harmed, we could lose customers and there could be a material adverse effect on our business, financial condition and results of operations.If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we could outsource needed production or enter into licensing or other third‑party arrangements, this could reduce our gross margin and expose us to the risks inherent in relying on others. We also cannot assure you that our suppliers will deliver an adequate supply of required components on a timely basis or that they will adequately comply with the QSR. Failure to obtain these components on a timely basis would disrupt our manufacturing processes and increase our costs, which would harm our operating results.
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If we are unable to develop new products or enhance existing products to meet our customers’ needs and compete favorably in the market, we may be unable to attract or retain customers.
Our success depends on the successful development, regulatory clearance or approval, introduction and commercialization of new generations of products, treatment systems, and enhancements to and/or simplification of existing products that will meet our customers’ needs provide novel features and compete favorably in the market. The CyberKnife and TomoTherapy Systems, which are currently our principal products, are technologically complex and must keep pace with, among other things, the products of our competitors and new technologies. We are making significant investments in long‑term growth initiatives. Such initiatives require significant capital commitments, involvement of senior management and other investments on our part, which we may be unable to recover. Our timeline for the development of new products or enhancements may not be achieved and price and profitability targets may not prove feasible. Commercialization of new products may prove challenging, and we may be required to invest more time and money than expected to successfully introduce them. Once introduced, new products may adversely impact orders and sales of our existing products, or make them less desirable or even obsolete. Compliance with regulations, competitive alternatives, and shifting market preferences may also impact the successful implementation of new products or enhancements. Our inability to develop, gain regulatory approval for or supply competitive products to the market as quickly and effectively as our competitors could limit market acceptance of our products and reduce our sales.
Our ability to successfully develop and introduce new products, treatment systems and product enhancements and simplifications, and the revenues and costs associated with these efforts, will be affected by our ability to:
properly identify and address customer needs;
prove feasibility of new products in a timely manner;
educate physicians about the use of new products and procedures;
comply with internal quality assurance systems and processes timely and efficiently;
manage the timing and cost of obtaining regulatory approvals or clearances;
accurately predict and control costs associated with inventory overruns caused by phase‑in of new products and phase‑out of old products;
price new products competitively;
manufacture and deliver our products in sufficient volumes on time and accurately predict and control costs associated with manufacturing, installation, warranty and maintenance of the products;
meet our product development plan and launch timelines;
improve manufacturing yields of components; and
manage customer demands for retrofits of both old and new products.
Even if customers accept new products or product enhancements, the revenues from these products may not be sufficient to offset the significant costs associated with making them available to customers.
We cannot be sure that we will be able to successfully develop, obtain regulatory approval or clearance for, manufacture or introduce new products, treatment systems or enhancements, the roll‑out of which involves compliance with complex quality assurance processes, including QSR. Failure to obtain regulatory approval or clearance for our products or to complete these processes in a timely and efficient manner could result in delays that could affect our ability to attract and retain customers, or could cause customers to delay or cancel orders, causing our backlog, revenues and operating results to suffer.
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If we do not effectively manage our growth, our business may be significantly harmed.
In order to implement our business strategy, we expect continued growth in our infrastructure requirements, particularly as we expand into new and growing markets as well as expand our manufacturing capacities and sales and marketing capabilities. To manage our growth, we must expand our facilities, augment our management, operational and financial systems, hire and train additional qualified personnel, scale‑up our manufacturing capacity and expand our marketing and distribution capabilities. Our manufacturing, assembly and installation process is complex and occurs over many months and we must effectively scale this entire process to satisfy customer expectations and changes in demand. Further, to accommodate our growth and compete effectively, we will be required to make improvements to our business operations. We cannot be certain that our personnel, systems, procedures and internal controls will be adequate to support our future operations and any expansion of our systems and infrastructure may require us to commit significant additional financial, operational and management resources. If we cannot manage our growth effectively, our business will suffer.
We could become subject to product liability claims, product recalls, other field actions and warranty claims that could be expensive, divert management’s attention and harm our business.
Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing, sale, installation, servicing, and support of medical device products. We may be held liable if a CyberKnife or TomoTherapy System or our Precision Treatment Planning or iDMS Data Management System software causes injury or death or is found otherwise unsuitable during usage. Our products incorporate sophisticated components and computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation. Because our products are designed to be used to perform complex surgical and therapeutic procedures involving delivery of radiation to the body, defects, even if small, could result in a number of complications, some of which could be serious and could harm or kill patients. Any alleged weaknesses in physician training and services associated with our products may result in unsatisfactory patient outcomes and product liability lawsuits. It is also possible that defects in the design, manufacture or labeling of our products might necessitate a product recall or other field corrective action, which may result in warranty claims beyond our expectations and may harm our reputation and create adverse publicity. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs that may not be covered by insurance and be time-consuming to defend. We may also be subject to claims for personal injury, property damage or economic loss related to, or resulting from, any errors or defects in our products, or the installation, servicing and support of our products, or any professional services rendered in conjunction with our products. Adverse publicity related to any product liability actions may cause patients to be less receptive to radiation therapy generally or our products specifically and could also result in additional regulation that could adversely affect our ability to promote, manufacture and sell our products. The coverage limits of our insurance policies may not be adequate to cover future claims. If sales of our products increase or we suffer future product liability claims, we may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts of coverage. A product liability claim, any product recalls or other field actions or excessive warranty claims, whether arising from defects in design or manufacture or labeling, could negatively affect our sales or require a change in the design, manufacturing process or the indications for which our systems or software may be used, any of which could harm our reputation and business and result in a decline in revenue.
In addition, if a product we designed or manufactured is defective, whether because of design or manufacturing, supplied parts, or labeling defects, improper use of the product or other reasons, we may be required to notify regulatory authorities and/or to recall the product, possibly at our expense. We have voluntarily initiated recalls and product corrections in the past, including one recall for the TomoTherapy System in fiscal year 2018 that has been requested for closure with the FDA. In fiscal year 2019, we have voluntarily opened three recalls involving the CyberKnife System. As of June 30, 2019, one such recall was closed, another has been requested for closure and is under review with FDA and one is still proceeding. We are committed to the safety and precision of our products and while no serious adverse health consequences have been reported in connection with these recalls and the costs associated with each such recall were not material, we cannot ensure that the FDA will not require that we take additional actions to address problems that resulted in previous recalls or that similar or more significant product recalls will not occur in the future. A required notification of a correction or removal to a regulatory authority or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other civil or criminal penalties. The adverse publicity resulting from any of these actions could cause customers to review and potentially terminate their relationships with us. These investigations, corrections or recalls, especially if accompanied by unfavorable publicity, patient injury or termination of customer contracts, could result in incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business.
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Our reliance on single‑source suppliers for critical components of the CyberKnife and TomoTherapy Systems could harm our ability to meet demand for our products in a timely and cost effective manner.
We currently depend on single‑source suppliers for some of the critical components necessary to assemble the CyberKnife and TomoTherapy Systems, including, with respect to the CyberKnife System, the robot, couch and magnetron and, with respect to the TomoTherapy Systems, the ring gantry, couch, solid state modulator and magnetron. If any single‑source supplier was to cease delivering components to us or fail to provide the components to our specifications and on a timely basis, we might be required to find alternative sources for these components. The disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our results of operations. In some cases, alternative suppliers may be located in the same geographic area as existing suppliers, and are thus subject to the same economic, political and geographic factors that may affect existing suppliers to meet our demand. We may have difficulty or be unable to find alternative sources for these components. As a result, we may be unable to meet the demand for the CyberKnife or TomoTherapy Systems, which could harm our ability to generate revenue and damage our reputation. Even if we do find alternate suppliers, we will be required to qualify any such alternate suppliers and we would likely experience a lengthy delay in our manufacturing processes or a cessation in production, which would result in delays of shipment to end users. We cannot assure you that our single‑source suppliers will be able or willing to meet our future demands.
We generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single‑source supplier fails to deliver components on a timely basis. Furthermore, if we are required to change the manufacturer of a critical component of the CyberKnife or TomoTherapy Systems, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements and guidelines, which could further impede our ability to manufacture our products in a timely manner. If the change in manufacturer results in a significant change to the product, a new 510(k) clearance would be necessary, which would likely cause substantial delays. The disruption or termination of the supply of key components for the CyberKnife or TomoTherapy Systems could harm our ability to manufacture our products in a timely manner or within budget, harm our ability to generate revenue, lead to customer dissatisfaction and adversely affect our reputation and results of operations.
We depend on key employees, the loss of whom would adversely affect our business. If we fail to attract and retain employees with the expertise required for our business, we may be unable to continue to grow our business.
We are highly dependent on the members of our senior management, sales, marketing, operations and research and development staff. Our future success will depend in part on our ability to retain our key employees and to identify, hire and retain additional personnel. Competition for qualified personnel in the medical device industry is intense and finding and retaining qualified personnel with experience in our industry is very difficult. We believe there are only a limited number of individuals with the requisite skills to serve in many of our key positions and we face significant competition for key personnel and other employees, particularly in the San Francisco Bay Area where our headquarters is located, from other medical equipment and software manufacturers, technology companies, universities and research institutions. As a result, we may not be able to retain our existing employees or hire new employees quickly enough to meet our needs. Moreover, we have in the past conducted reductions in force in order to optimize our organizational structure and reduce costs, and certain senior personnel have also departed for various reasons. At the same time, we may face high turnover, requiring us to expend time and resources to source, train and integrate new employees. The challenging markets in which we compete for talent may also require us to invest significant amounts of cash and equity to attract and retain employees. In addition, a significant portion of our compensation to our key employees is in the form of stock related grants. A prolonged depression in our stock price could make it difficult for us to retain our key and other employees and recruit additional qualified personnel and we may have to pay additional compensation to employees to incentivize them to join or stay with us. We do not maintain, and do not currently intend to obtain, key employee life insurance on any of our personnel. If we fail to hire and retain key personnel and other employees, we may be unable to continue to grow our business successfully.
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Disruption of critical information
becomes available.technology systems, infrastructure and data could harm our business and financial condition.Information technology helps us operate more efficiently, interface with customers, maintain financial accuracy and efficiency and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build, sustain and secure the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions or the loss of or damage to intellectual property through a security breach. Such security breaches could expose us to a risk of loss of information, litigation and possible liability to employees, customers and regulatory authorities. In addition, we have moved some of our data and information to a cloud computing system, where applications and data are hosted, accessed and processed through a third‑party provider over a broadband internet connection. In a cloud computing environment, we could be subject to outages and security breaches by the third‑party service provider. If our data management systems do not effectively collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, computer viruses, security breaches, catastrophic events or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows and the timeliness with which we internally and externally report our operating results. As a result, our information systems require an ongoing commitment of significant resources to maintain, protect, and enhance existing systems and develop new systems to keep pace with continuing changes in information processing technology, evolving legal and regulatory standards, the increasing need to protect patient and customer information, and the information technology needs associated with our changing products and services. There can be no assurance that our process of consolidating the number of systems we operate, upgrading and expanding our information systems capabilities, continuing to build security into the design of our products, protecting and enhancing our systems and developing new systems to keep pace with continuing changes in information processing technology will be successful or that additional systems issues will not arise in the future.
In addition, data privacy breaches from errors, malfeasance or misconduct by employees, contractors or others with permitted access to our systems may pose a risk that sensitive data, including individually identifiable data, may be exposed to unauthorized person or to the public and compromise our security systems. There can be no assurance that any efforts we make to prevent against such privacy breaches will prevent breakdowns or breaches in our systems that could adversely affect our business. Third-parties may also attempt to fraudulently induce employees or customers into disclosing user names, passwords or other sensitive information, which may in turn be used to access our information technology systems. For example, our employees have received “phishing” e-mails attempting to induce them to divulge sensitive information. In addition, unauthorized persons may attempt to hack into our products or systems to obtain personal data relating to patients or employees, our confidential or proprietary information or confidential information we hold on behalf of third-parties, which, if successful, could pose a risk of loss of data, risk to patient safety and risk of product recall. As the techniques used to obtain unauthorized access to our systems change frequently and may be difficult to detect, we may not be able to anticipate and prevent these intrusions or mitigate them when they occur. Moreover, we manufacture and sell hardware and software products that allow our customers to store confidential information about their patients. Both types of products are often connected to and reside within our customers’ information technology infrastructures. We do not have measures to secure our customers’ equipment or any information stored in our customers’ systems or at their locations, which is the responsibility of our customers. While we have implemented security measures to protect our hardware and software products from unauthorized access, these measures may not be effective in securing these products, particularly since techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target. A breach of network security and systems or other events that cause the loss or public disclosure of, or access by third-parties to, sensitive information stored by us or our customers could have serious negative consequences for our business, including loss of information, indemnity obligations, possible fines, penalties and damages, reduced demand for our products and services, an unwillingness of our customers to use our products or services, harm to our reputation and brand, and time‑consuming and expensive litigation, any of which could have an adverse effect on our financial results.
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Any actual or perceived failure by us to comply with legal or regulatory requirements related to privacy or data security in one or multiple jurisdictions could result in proceedings, actions or penalties against us.
There are numerous state, federal and foreign laws, regulations, decisions and directives regarding privacy and the collection, storage, transmission, use, processing, disclosure and protection of personally identifiable information and other personal, customer or other data, the scope of which is continually evolving and subject to differing interpretations. Our worldwide operations mean that we are subject to data protection and cyber security laws and regulations in many jurisdictions, and that some of the data we process, store and transmit may be transmitted across countries. For example, in the U.S., Health Insurance Portability and Accountability Act (“HIPAA”) privacy and security rules require us as a business associate to protect the confidentiality of patient health information, and the Federal Trade Commission has begun to assert authority over protection of privacy and the use of cyber security in information systems. In Europe, the General Data Protection Regulation (“GDPR”), which went into effect in May 2018, imposes several stringent requirements for controllers and processors of personal data that will increase our obligations and, in the event of violations, may impose significant fines of up to the greater of 4% of worldwide annual revenue or €20 million. In the UK, a Data Protection Bill that substantially implements the GDPR became law in May 2018. China and Russia have also passed laws that require individually identifiable data on their citizens to be maintained on local servers and that may restrict transfer or processing of that data. Further, in June 2018, California passed the California Consumer Privacy Act of 2018 (“CCPA”), which will become effective on January 1, 2020. CCPA imposes stringent data privacy and data protection requirements for the data of California residents, and provides for penalties for noncompliance of up to $7,500 per violation. The restrictions imposed by these laws and regulations may limit the use and adoption of our products, reduce overall demand for our products, require us to modify our data handling practices and impose additional costs and burdens. In addition, U.S. and international laws that have been applied to protect user privacy (including laws regarding unfair and deceptive practices in the U.S. and GDPR in the EU) may be subject to evolving interpretations or applications in light of privacy developments. As a result, we may be subject to significant consequences, including penalties and fines, for any failure to comply with such laws, regulations and directives.
Data protection legislation around the world is comprehensive and complex and there has been a recent trend towards more stringent enforcement of requirements regarding protection and confidentiality of personal data. The restrictions imposed by such laws and regulations may limit the use and adoption of our products and services, reduce overall demand for our products and services, require us to modify our data handling practices, and impose additional costs and burdens. With increasing enforcement of privacy, data protection and cyber security laws and regulations, there is no guarantee that we will not be subject to enforcement actions by governmental bodies or that our costs of compliance will not increase significantly. Enforcement actions can be costly and interrupt regular operations of our business. In addition, there has been a developing trend of civil lawsuits and class actions relating to breaches of consumer data held by large companies. While we have not been named in any such suits, if a substantial breach or loss of data from our records were to occur, we could become a target of such litigation. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Our failure to comply with applicable laws and regulations could result in enforcement action against us, including fines and public censure, claims for damages by customers and other affected individuals, damage to our reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could harm our business, results of operations and financial condition.
If third‑party payors do not provide sufficient coverage and reimbursement to healthcare providers for use of the CyberKnife and TomoTherapy Systems, demand for our products and our revenue could be adversely affected.
Our customers rely significantly on reimbursement from public and private third‑party payors for CyberKnife and TomoTherapy systems procedures. Our ability to commercialize our products successfully and increase market acceptance of our products will depend in significant part on the extent to which public and private third‑party payors provide adequate coverage and reimbursement for procedures that are performed with our products. Third‑party payors may establish or change the reimbursement for medical products and services that could significantly influence the purchase of medical products and services. If reimbursement policies or other cost containment measures are instituted in a manner that significantly reduces the coverage or payment for the procedures that are performed with our products, our revenue may decline, our existing customers may not continue using our products or may decrease their use of our products, and we may have difficulty obtaining new customers. Such actions would likely have a material adverse effect on our operating results.
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CMS reviews reimbursement rates annually and may implement significant changes in future years, which could discourage existing and potential customers from purchasing or using our products. Further, outside of the U.S., reimbursement practices vary significantly by country. Market acceptance of our products may depend on the availability and level of coverage and reimbursement in any country within a particular time.
The safety and efficacy of our products for certain uses is not yet supported by long‑term clinical data, and our products may therefore prove to be less safe and effective than initially thought.
Although we believe that the CyberKnife and TomoTherapy Systems have advantages over competing products and technologies, we do not have sufficient clinical data demonstrating these advantages for all tumor indications. In addition, we have only limited five‑year patient survival rate data, which is a common long‑term measure of clinical effectiveness in cancer treatment. We also have limited clinical data directly comparing the effectiveness of the CyberKnife System to other competing systems. Future patient studies or clinical experience may indicate that treatment with the CyberKnife System does not improve patient survival or outcomes.
Likewise, because the TomoTherapy Systems have only been on the market since 2003, we have limited complication or patient survival rate data with respect to treatment using the systems. In addition, while the effectiveness of radiation therapy is well understood, there is a growing but still limited number of peer‑reviewed medical journal publications regarding the efficacy of highly conformal treatment such as that delivered by the TomoTherapy Systems. If future patient studies or clinical experience do not support our beliefs that the TomoTherapy Systems offer a more advantageous treatment for a wide variety of cancer types, use of the systems could fail to increase or could decrease, and our business would therefore be adversely affected.
Such results could reduce the rate of reimbursement by both public and private third‑party payors for procedures that are performed with our products, slow the adoption of our products by physicians, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable. In addition, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, the FDA could rescind our clearances, our reputation with physicians, patients and others may suffer and we could be subject to significant legal liability.
We rely on third parties to perform spare parts shipping and other logistics functions on our behalf. A failure or disruption at our logistics providers would adversely impact our business.
Customer service is a critical element of our sales strategy. Third‑party logistics providers store most of our spare parts inventory in depots around the world and perform a significant portion of our spare parts logistics and shipping activities. If any of our logistics providers terminates its relationship with us, suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, or we have to change and qualify alternative logistics providers for our spare parts, shipments of spare parts to our customers may be delayed and our reputation, business, financial condition and results of operations may be adversely affected.
Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling our product.
The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. In particular, the field of radiation treatment of cancer is well established and crowded with the intellectual property of competitors and others. We also expect that other participants will enter the field. A number of companies in our market, as well as universities and research institutions, have issued patents and have filed patent applications which relate to the use of radiation therapy and stereotactic radiosurgery to treat cancerous and benign tumors.
Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third‑party patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that our products and the methods we employ in the use of our products are covered by U.S. or foreign patents held by them.
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In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware, and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for less invasive cancer treatment alternatives grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Regardless of the merit of infringement claims, they can be time‑consuming and result in costly litigation and diversion of technical and management personnel. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise funds, if necessary, to continue our operations.
In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual property were upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from selling our products unless we obtain a license or are able to redesign the product to avoid infringement. Required licenses may not be made available to us on acceptable terms or at all. If we are unable to obtain a license or successfully redesign our system, we might be prevented from selling such system. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or other person, we may be required to pay damages, pay ongoing royalties or otherwise settle such matter upon terms that are unfavorable to us. In these circumstances, we may be unable to sell our products at competitive prices or at all, and our business and operating results could be harmed.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As is common in the medical device industry, we employ individuals who were previously employed at other medical equipment or biotechnology companies, including our competitors or potential competitors. We may be subject to claims that we or those employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against claims of this nature, litigation could result in substantial costs and be a distraction to management.
It is difficult and costly to protect our intellectual property and our proprietary technologies and we may not be able to ensure their protection.
Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products. Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may be unsuccessful in defending our patents and other proprietary rights against third‑party challenges. As key patents expire, our ability to prevent competitors from copying our technology may be limited. In addition, patent reform legislation or precedent could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents.
In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard the technology underlying our products. If these measures do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced. Although we have attempted to obtain patent coverage for our technology where available and appropriate, there are aspects of the technology for which patent coverage was never sought or never received. There also may be countries in which we sell or intend to sell the CyberKnife or TomoTherapy Systems but have no patents or pending patent applications. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection. Although we have several issued patents in the U.S. and in foreign countries protecting aspects of the CyberKnife and TomoTherapy Systems, our pending U.S. and foreign patent applications may not issue, may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable. In addition, many countries limit the enforceability of patents against certain third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
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Similarly, our issued patents and those of our licensors may not provide us with any competitive advantages. Competitors may be able to design around our patents or develop products which provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, the laws of some foreign countries, such as China where our newly announced joint venture will operate, may not protect our intellectual property rights to the same extent as do the laws of the United States and, even if they do, uneven enforcement and procedural barriers may exist in such countries. In the event a competitor or other third party infringes upon our patent or other intellectual property rights or otherwise misappropriates such rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention from our core business. Damage awards resulting from successful litigation in foreign jurisdictions may not be in amounts commensurate with damage awards in the U.S. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. In addition, we may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially valuable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us.
We also license patent and other proprietary rights to aspects of our technology to third parties in fields where we currently do not operate as well as in fields where we currently do operate. Disputes with our licensees may arise regarding the scope and content of these licenses. Further, our ability to expand into additional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future.
Additionally, we have written agreements with collaborators regarding the ownership of intellectual property arising from our collaborations. These agreements generally provide that we must negotiate certain commercial rights with collaborators with respect to joint inventions or inventions made by our collaborators that arise from the results of the collaboration. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s technology, we may be limited in our ability to utilize these intellectual property rights. In addition, we may face claims by third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome could harm our business.
The policies and procedures we have in place to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge methods and know‑how. If we are unable to protect our intellectual property rights, we may be unable to prevent competitors from using our own inventions and intellectual property to compete against us and our business may be harmed.
Unfavorable results of legal proceedings could materially and adversely affect our financial condition.
We are and may become a party to legal proceedings, claims and other legal matters in the ordinary course of business or otherwise. These legal proceedings, claims and other legal matters, regardless of merit, may be costly, time‑consuming and require the attention of key management and other personnel. The outcomes of such matters are uncertain and difficult to predict. If any such matters are adjudicated against us, in whole or in part, we may be subject to substantial monetary damages, disgorgement of profits, and injunctions that prevent us from operating our business, any of which could materially and adversely affect our business and financial condition. We cannot guarantee that our insurance coverage will be sufficient to cover any damages awarded against us. Further, legal proceedings, and any adverse resolution thereof, can result in adverse publicity and damage to our reputation, which could adversely impact our business.
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Because the majority of our product revenue is derived from sales of the CyberKnife and TomoTherapy Systems, which have a long and variable sales and installation cycle, our revenues and cash flows may be volatile and difficult to predict.
Our primary products are the CyberKnife and TomoTherapy Systems. We expect to generate substantially all of our revenue for the foreseeable future from sales of and service contracts for the CyberKnife and TomoTherapy Systems. The CyberKnife and TomoTherapy Systems have lengthy sales and purchase order cycles because they are major capital equipment items and require the approval of senior management at purchasing institutions. In addition, sales to some of our customers are subject to competitive bidding or public tender processes. These approval and bidding processes can be lengthy. Selling our systems, from first contact with a potential customer to a complete order, generally spans six months to two years and involves personnel with multiple skills. The sales process in the
United StatesU.S. typically begins withpre-sellingpre‑selling activity followed by sales presentations and other sales related activities. After the customer has expressed an intention to purchase a CyberKnife or TomoTherapy System, we negotiate and enter into a definitive purchase contract with the customer. The negotiation of terms that are not standard for Accuray may require additional time and approvals. Typically, following the execution of the contract, the customer begins the building or renovation of aradiation-shieldedradiation‑shielded facility to house the CyberKnife or TomoTherapy System, which together with the subsequent installation of the CyberKnife or TomoTherapy System, can take up to 24 months to complete. In order to construct this facility, the customer must typically obtain radiation device installation permits, which are granted by state and local government bodies, each of which may have different criteria for permit issuance. If a permit was denied for installation at a specific hospital or treatment center, our CyberKnife or TomoTherapy System could not be installed at that location. In addition, some of our customers are cancer centers or facilities that are new, and in these cases it may be necessary for the entire facility to be completed before the CyberKnife or TomoTherapy System can be installed, which can result in additional construction and installation delays. Our sales and installations of CyberKnife and TomoTherapy Systems tend to be heaviest during the third month of each fiscal quarter.Under our revenue recognition policy, we
generally do notrecognize revenue attributable to a CyberKnife or TomoTherapy System purchase when control is transferred upon delivery while an element of installation is deferred untilafter installation has occurred, if we are responsible for providing installation. For international sales through distributors, we typically recognize revenue when the system is shipped and we have evidence of a purchase commitment from the end user.performed. Underour current forms of purchase and service contracts, we record a majority of the purchase price as revenue for a CyberKnife or TomoTherapy System upon installation or delivery of the system. Events beyond our control may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue, including delays in the customer obtaining funding or financing, delays in construction at the customer site or delays in the customer obtaining receipt of regulatory approvals such as certificates of need.
The long sales cycle, together with delays in the
shipmentdelivery and installation of CyberKnife and TomoTherapy Systems or customer cancellations that could affect our ability to recognize revenue, could adversely affect our cash flows and revenue, which would harm our results of operations and may result in significant fluctuations in our reporting of quarterly revenues. Because of these fluctuations, it is likely that in some future quarters, our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance.We depend on
third-partythird‑party distributors to market and distribute our products in international markets. If our distributors fail to successfully market and distribute our products, our business will be materially harmed.We depend on a number of distributors in our international markets. We cannot control the efforts and resources our
third-partythird‑party distributors will devote to marketing the CyberKnife or TomoTherapy Systems. Our distributors may not be able to successfully market and sell the CyberKnife or TomoTherapy Systems, may not devote sufficient time and resources to support the marketing and selling efforts and may not market the CyberKnife or TomoTherapy Systems at prices that will permit the product to develop, achieve or sustain market acceptance. In some jurisdictions, we rely on our distributors to manage the regulatory process and oversee their activities such that they are in compliance with all laws that govern their activities, such as the U.S. Foreign Corrupt Practices Act (“FCPA”), and we are dependent on their ability to do so effectively. In addition, if a distributor is terminated by us or goes out of business, it may take us a period of time to locate an alternative distributor, to seek appropriate regulatory approvals and to train its personnel to market the CyberKnife or TomoTherapy Systems, and our ability to sell and service the CyberKnife or TomoTherapy Systems in the region formerly serviced by such terminated distributor could be materially and adversely affected. Any of our distributors could become insolvent or otherwise become unable to pay amounts owed to us when due. If any of these distributor relationships end and are not replaced, our revenues from product sales or the ability to service our products in the territories serviced by these distributors could be adversely44
affected. Any of these factors could materially and adversely affect our revenue from international markets, increase our costs in those markets or damage our reputation. If we are unable to attract additional international distributors, our international revenue may not grow. If our distributors experience difficulties, do not comply with regulatory or legal requirements that results in fines or penalties, do not actively market the CyberKnife or TomoTherapy Systems or do not otherwise perform under our distribution agreements, our potential for revenue and gross margins from international markets may be dramatically reduced, and our business could be harmed.
The high unit price of the CyberKnife and TomoTherapy Systems, as well as other factors, may contribute to substantial fluctuations in our operating results, which could adversely affect our stock price.
Because of the high unit price of the CyberKnife and TomoTherapy Systems and the relatively small number of units installed each quarter, each installation of a CyberKnife or TomoTherapy System can represent a significant percentage of our revenue for a particular quarter. Therefore, if we do not install a CyberKnife or TomoTherapy System when anticipated, we will not be able to recognize the associated revenue and our operating results will vary significantly from our expectations. This is of particular concern
inwhen thecurrent volatileeconomic environment is volatile, where we have had experiences with customers cancelling or postponing orders for our CyberKnife and TomoTherapy Systems and delaying any requiredbuild-outs.build‑outs. These fluctuations and other potential fluctuations mean that you should not rely upon our operating results in any particular period as an indication of future performance.As a strategy to assist our sales efforts, we may offer extended payment terms, which may potentially result in higher
Days Sales Outstandingdays sales outstanding, reduced cash flows in a particular period and greater payment defaults.We offer longer or extended payment terms for qualified customers in some circumstances. As of June 30,
2016,2019, customer contracts with extended payment terms of more than one year amounted to approximately12%4% of our total accounts receivable balance. While we qualify customers to whom we offer longer or extended payment terms, their financial positions may change adversely over the longer time period given for payment. This may result in an increase in payment defaults, which would affect our revenue, as we recognize revenue on such transactions on a cash basis. Any increase in days sales outstanding could also negatively affect our cash flow.Our operations are vulnerable to interruption or loss because of natural disasters, epidemics, terrorist acts and other events beyond our control, which would adversely affect our business.
We have facilities in countries around the world, including
threetwo manufacturing facilities, each of which is equipped to manufacture unique components of our products. The manufacturing facilities are located inSunnyvale, California,Madison, Wisconsin, and Chengdu, China. We do not maintain backup manufacturing facilities forallany of our manufacturing facilities or for our IT facilities, so we depend on each of our current facilities for the continued operation of our business. In addition, we conduct a significant portion of other activities, including administration and data processing, at facilities located inthe State ofCalifornia which has experienced major earthquakes in the past, as well as other natural disasters. Chengdu, China, where one of our manufacturing facilities is located, has also experienced major earthquakes in the past. We do not carry earthquake insurance. Unexpected events at any of our facilities, including fires or explosions; natural disasters, such as hurricanes, floods, tornados, and earthquakes; war or terrorist activities; unplanned outages; supply disruptions; and failures of equipment or systems, or the failure to take adequate steps to mitigate the likelihood or potential impact of such events, could significantly disrupt our operations, delay or prevent productmanufacturemanufacturing and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, result in large expenses to repair or replace the facilities, and adversely affect our results of operation. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil or an epidemic outbreak could have a negative effect on our operations and the operations of our suppliers and customers and the ability to travel, which could harm our business, financial condition and results of operations.45
We may attempt to acquire new businesses, products or technologies, or enter into strategic collaborations or alliances, including forming joint ventures, and if we are unable to successfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expected benefits or harm our existing business.
Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customer demands, and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, products or technologies or through collaborating with complementary businesses, including forming joint ventures, such as our recently announced joint venture in China, rather than through internal development. The identification of suitable acquisition,
oralliance and joint venture partner candidates can be difficult, time consuming, and costly, and we may not be able to successfully complete identified acquisitions, alliances, oralliances.joint ventures. Other companies may compete with us for these strategic opportunities. In addition, even if we successfully complete an acquisition, alliance, oralliance,joint venture, we may not be able to successfully integrate newly acquired organizations, products or technologies into our operations or timely and effectively commence operations of any joint venture or other alliance because the process of integration could be expensive, time consuming and may strain ourresources, andresources. Furthermore, we maynot realizebe required to contribute significant amounts of capital or incur losses in the initial stages of an alliance or joint venture, particularly as selling and marketing activities increase ahead of expectedbenefitslong-term revenue. For example, we are expected to make initial capital contributions to our joint venture in China before December 31, 2019 and further contributions may be necessary in the future as the joint venture begins operations in China in order to achieve our long-term strategy in China. In addition, the process for customers of the acquired company, alliance or joint venture to comply with local or foreign regulatory requirements that may be required to purchase our products may cause delays in the acquisition target, alliance partner or joint venture’s ability to conduct business. For example, anyacquisition, collaborationdelays in customers in China to obtain Class A orstrategic alliance.Class B user licenses could delay our joint venture’s ability to initiate sales and recognize revenue in China. Furthermore, the products and technologies that we acquire, jointly develop, or with respect to which we collaborate may not be successful, or may require significantly greater resources and investments than we originally anticipated. Implementing or acquiring new lines of business or offering new products and services within existing lines of business can affect the sales and profitability of existing lines of business or products and services, including as a result of sales channel conflicts. In addition, we may not be in a position to exercise sole decision making authority regarding any strategic collaboration, alliance or joint venture, which could result in impasses on decisions or decisions made by our partners, and our partners in such collaborations, alliances or joint ventures may have economic or business interests that are, or may become, inconsistent with our interests. Collaborations, alliances and joint ventures can be difficult to manage and may involve significant expense and divert the focus and attention of our management and other key personnel away from our existing businesses. With respect to any acquisition, we may be unable to retain employees of acquired companies, or retain the acquiredcompany'scompany’s customers, suppliers, distributors or other partners who are our competitors or who have close relationships with our competitors.Consequently,In addition, with respect to joint ventures, we may notachieve anticipated benefitsbe able to attract qualified employees, acquire customers, or develop reliable supply, distribution or other partnerships. As a result of certain collaborations, alliances and joint ventures we could face potential damage to existing customer relationships or lack of customer acceptance or inability to attract new customers. These risks could be magnified to the extent that any new collaboration, alliance or joint venture would result in a significant increase in operations in developing markets. Future acquisitions or allianceswhichcouldharm our existing business. In addition, future acquisitions or alliances couldalso result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities, orexpenses or other charges such as
in-processin‑process research and development, any of which could harm our business and affect our financial results or cause a reduction in the price of our common stock. Further, acquisition targets, alliance partners and joint ventures may also operate in foreign jurisdictions with laws and regulations with which we have limited familiarity, which could adversely impact our ability to comply with such laws and regulations and may lead to increased litigation risk. Such laws may also offer us inadequate or less intellectual property protection relative to U.S. laws, which may impact our ability, as well as the ability of the acquisition target, alliance partner and joint venture, to safeguard our respective intellectual property from infringement and misappropriation. As a result of these and other factors, we may not realize the expected benefits of any acquisition, collaboration, joint venture or strategic alliance or such benefits may not be realized at expected levels or within the expected time period. The failure to successfully consummate such strategic transactions and effectively integrate and execute following such consummation may have an adverse impact on our growth, profitability, financial position and results of operations.46
Multiple factors may adversely affect our ability to fully utilize certain tax loss carryforwards.
As of June 30,
2016,2019, we had approximately$325.3$330.9 million and$145.6$131.6 million in federal and state net operating loss carry forwards,respectively, whichrespectively. The federal and state carryforwards expire in varying amounts beginning in20192025 for federal and20162020 for state purposes. In addition, as of June 30,2016,2019, we had federal and state research and development tax credit carryforwards of approximately$17.9$20.6 million and$17.6$20.1 million, respectively.TheIf not utilized, such research credits for federalresearch creditstax purposes will begin to expire in2019,2020, while the California research credits have no expiration date andtheother state research credits will begin to expire in2017.2020. Utilization of our net operating loss and credit carry forwards is subject to annual limitation due to the application of the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions to us. Future changes in our stock ownership, including future offerings, as well as changes that may be outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. However, none of the federal and state net operating loss carryforwards are expected to expire as a result of the ownership change limitation.The Tax Cuts and Jobs Act of 2017 could adversely affect our business and financial condition.
In December 2017, the “Tax Cuts and Jobs Act” (the “Tax Act”) was enacted into law, which significantly amends the Internal Revenue Code of 1986. The Tax Act, among other things, reduced the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limited the tax deduction for interest expense to 30% of adjusted earnings, eliminated net operating loss carrybacks, imposed a one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, allows immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifies or repeals many business deductions and credits. The ongoing and future impact on our business will continue to be assessed due to the complexity and interdependency of the legislative provisions, as well as any new or proposed Treasury regulations, which may yet be issued. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected.
Our results may be impacted by changes in foreign currency exchange rates.
Currently, the majority of our international sales are denominated in U.S. Dollars. As a result, an increase in the value of the U.S. Dollar relative to foreign currencies could require us to reduce our sales price or make our products less competitive in international markets. For example, the announcement of Brexit caused severe volatility in global currency exchange rate fluctuations that resulted in the strengthening of the U.S.
dollarDollar against foreign currencies in which we conduct business. We believe the strengthening of the U.S. Dollar has caused a potential delay in orders and we may continue to see our sales decline due to the strengthening of the U.S. Dollar. Also, if our international sales increase, we may enter into a greater number of transactions denominated innon-U.S.non‑U.S. Dollars, which would expose us to foreign currency risks, including changes in currency exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business would be materially harmed.If we fail to maintain an effective system of internal control over financial reporting, our ability to produce timely and accurate financial results could be impaired. As a result, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our business and our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal, or unauthorized transactions. If we cannot maintain effective controls and provide timely and reliable financial reports, our business and operating results could be harmed.
A failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and operating results and our stock price, and we could be subject to stockholder litigation.
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In addition, it may be difficult to timely determine the effectiveness of our financial reporting systems and internal controls because of the complexity of our financial model. We recognize revenue from a range of transactions including CyberKnife and TomoTherapy Systems sales and services. The CyberKnife and TomoTherapy Systems are complex products that contain both hardware and software elements. The complexity of the CyberKnife and TomoTherapy Systems and of our financial model used to recognize revenue on such systems requires us to process a greater variety of financial transactions than would be required by a company with a less complex financial model. Accordingly, efforts to timely remediate deficiencies or weaknesses in our internal controls would likely be more challenging for us than they would for a company with a less complex financial model. Furthermore, if we were to find an internal control deficiency or material weakness, we may be required to amend or restate historical financial statements, which would likely have a negative impact on our stock price.
Changes in interpretation or application of generally accepted accounting principles may adversely affect our operating results.
We prepare our financial statements to conform to United States Generally Accepted Accounting Principles. These principles are subject to interpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other regulatory or accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Additionally, as we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period. For example,
due toupon adoption of ASC 606, we now recognize system revenue upon transfer of control, which is generally at time of delivery. Under thesignificanceprevious accounting guidance, we recognized system revenue upon acceptance when and if we have installation responsibilities. If circumstances change over time or interpretation of thesoftware component in certain of our products, we are currently bound by the softwarerevenue recognition rulesfor a portionchange, we could be required to adjust the timing of recognizing revenue and ourbusiness.financial results could suffer.Our liquidity could be adversely impacted by adverse conditions in the financial markets.
At June 30,
2016,2019, we had$119.8$76.8 million in cash and cashequivalents and $47.2 million in investments.equivalents. The available cash and cash equivalents are held in accounts managed bythird-partythird‑party financial institutions and consist of cash in our operating accounts and cash invested in money market funds.The investments are managed by third-party financial institutions and primarily consist of U.S. agency and corporate debt securities.To date, we have experienced no material realized losses on or lack of access to our invested cash, or cashequivalents or investments;equivalents; however, we can provide noassurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
At any point in time, we also have funds in our operating accounts that are with
third-partythird‑party financial institutions that exceed the Federal Deposit Insurance Corporation(FDIC),(“FDIC”) insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or become subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts.Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.
While we believe that our existing cash and cash equivalents
and investmentswill be sufficient to meet our anticipated cash needs for at least the next twelve months, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including the other risk factors described above and below.If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing, which could be difficult or impossible
independing on thecurrentstate of economic and capital marketsenvironments.environments at the time, as well as the state of our business, operating results and financial condition. Our debt levels may impair our ability to obtain additional financing in the future. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. We cannot assure that additional financing, if required or desired, will be available in amounts or on terms acceptable to us, if at all.48
Risks Related to the Regulation of our Products and Business
Modifications, upgrades, new indications and future products related to the CyberKnife or TomoTherapy Systems or
new indicationsthe Precision Treatment Planning or iDMS Data Management System software may require new FDA 510(k) clearances or premarket approvals andsuchsimilar licensing or approvals in international markets. Such modifications, or any defects in design, manufacture or labeling may require us to recall or cease marketing theCyberKnifeaffected systems orTomoTherapy Systemssoftware until approvals or clearances are obtained.The CyberKnife and TomoTherapy Systems as well as the Precision Treatment Planning and iDMS Data Management System software are medical devices that are subject to extensive regulation in the United States by local, state and the federal government, including
bythe FDA. The FDA regulates virtually all aspects of a medicaldevice'sdevice design, development, testing manufacturing, labeling, storage, record keeping, adverse event reporting, sale, promotion, distribution and shipping. Before a new medical device, or a new intended use or indicationofor claim for an existing product, can be marketed in the United States, it must first receive either premarket approval or 510(k) clearance from the FDA, unless an exemption exists. Either process can be expensive, lengthy and unpredictable. TheFDA'sFDA’s 510(k) clearance process generally takes from three to twelve months, but it can last longer. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, from the time the application is filed with the FDA. Additionally, outside of the United States, our products are subject to clearances and approvals by foreign governmental agencies similar to the FDA. In order to market our products internationally, we must obtain licenses or approvals from these governmental agencies, which could include local requirements and safety standards, and can be time consuming, burdensome and uncertain. Despite the time, effort and cost, there can be no assurance that a particular device or a modification of a device will be approved or cleared by the FDA or any foreign governmental agency in a timely fashion, if at all. Even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses of the product, which may limit the market for those products, and how those products can be promoted.Medical devices may only be marketed
onlyfor the indications for which they are approved or cleared. The FDA and other foreign governments also may changeitstheir policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delaypremarketapproval or510(k)clearance of our device, or could impact our ability to market our currently approved or cleared device. We are also subject to medical device reporting regulations which require us to report to the FDA and other international governmental agencies if our products cause or contribute to a death or a serious injury, or malfunction in a way that would likely cause or contribute to a death or a seriousinjury. We also are subject to
Quality System regulations.the QSR in the U.S. and ISO 13485 certification in many international markets, compliance with which is necessary to receive FDA and other international clearances or approvals to market new products and is necessary for us to be able to continue to market a cleared or approved product in the United States or globally. After a product is placed in the market, we are also subject to regulations by the FDA and Federal Trade Commission related to the advertising and promotion of our products to ensure our claims are consistent with our regulatory clearances, that there is scientific data to substantiate our claims and that our advertising is not false or misleading. Our products are also subject to state regulations and various worldwide laws and regulations.A component of our strategy is to continue to upgrade the CyberKnife and TomoTherapy
Systems.Systems as well as the Precision Treatment Planning an iDMS Data Management System software. Upgrades previously released by us required 510(k) clearance and international registration before we were able to offer them for sale. We expect our future upgrades will similarly require 510(k)clearance;clearance or approval; however, future upgrades may be subject tothesubstantially more time consuming data generation requirements and uncertain premarket approval or clearanceprocess.processes. If we were required to use the premarket approval process for future products or product modifications, it could delay or prevent release of the proposed products or modifications, which could harm our business.The FDA requires device manufacturers to make their own determination of whether or not a modification requires an approval or clearance; however, the FDA can review a
manufacturer'smanufacturer’s decision not to submit for additional approvals or clearances. Any modification to an FDA approved or cleared device that would significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new premarket approval or 510(k) clearance.The FDA has recently issued a draft guidance that, if finalized, will result in manufacturers needing to seek a significant number of new or additional clearances for changes made to legally marketed devices.We cannot assure you that the FDA will agree with our decisions not to seek approvals or clearances for particular device modifications or that we will be successful in obtaining premarket approvals or 510(k) clearances for modifications in a timely fashion, if at all.49
We have obtained 510(k) clearance for the CyberKnife Systems for the treatment of tumors anywhere in the body where radiation is indicated, and we have obtained 510(k) clearance for the TomoTherapy Systems to be used as integrated systems for the planning and delivery of IMRT for the treatment of cancer. We have made modifications to the CyberKnife and TomoTherapy Systems in the past and may make additional modifications in the future that we believe do not or will not require additional approvals or clearances. If the FDA disagrees, based on new finalized guidance and requires us to obtain additional premarket approvals or 510(k) clearances for any modifications to the CyberKnife or TomoTherapy Systems and we fail to obtain such approvals or clearances or fail to secure approvals or clearances in a timely manner, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA approval or clearance and we may be subject to significant regulatory fines or penalties.
The FDA and similar governmental authorities in other countries in which we market and sell our products have the authority to require the recall of our products in the event of material deficiencies or defects in design, manufacture or labeling. A government mandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling and user manuals. Any recall could divert
management'smanagement’s attention, cause us to incur significant expenses, generate negative publicity, harm our reputation with customers, negatively affect our future sales and business, require redesign of the CyberKnife or TomoTherapy Systems, and harm our operating results. In these circumstances, we may also be subject to significant enforcement action. If any of these events were to occur, our ability to introduce new or enhanced products in a timely manner would be adversely affected, which in turn would harm our future growth.We are subject to federal, state and foreign laws and regulations applicable to our
business practices,operations, the violation of which could result in substantial penalties and harm our business.In addition to regulation by the FDA and similar governmental authorities in other countries, our operations are subject to other laws and regulations, such as laws and rules governing interactions with healthcare providers, anti-corruption laws, privacy rules and transparency laws. In order to maintain compliance with these laws and requirements, we must continually keep abreast of any changes or developments to be able to integrate compliance protocols into the development and regulatory documentation of our products. Failure to maintain compliance could result in substantial penalties to us and harm our business.
Laws and ethical rules governing interactions with healthcare providers.
"anti-kickback"“anti‑kickback” laws, and similar state laws, prohibit soliciting, offering, paying or accepting any payments or other remuneration that is intended to induce any individual or entity to either refer patients to or purchase, lease or order, or arrange for or recommend the purchase, lease or order of, healthcare products or services for which payment may be made under federal and state healthcareprograms, such as Medicare and Medicaid. Such laws impact our sales, marketing and other promotional activities by reducing the types of financial arrangements we may have with our customers, potential customers, marketing consultants and other service providers. They particularly impact how we structure our sales offerings, including discount practices, customer support, product loans, education and training programs, physician consulting, research grants and other service arrangements. Many of these laws are broadly drafted and are open to a variety of interpretations, making it difficult to determine with any certainty whether certain arrangements violate such laws, even if statutory safe harbors are available.
In addition to such
anti-kickbackanti‑kickback laws, federal and state"false claims"“false claims” laws generally prohibit the knowing filing or causing the filing of a false claim or the knowing use of false statements to obtain payment from government payors. Although we do not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to"cause"“cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, or through certain other activities, including promoting products for uses or indications that are not approved by the FDA.We are also subject to federal and state physician
self-referralself‑referral laws. The federal Ethics in Patient Referrals Act of 1989, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain"designated“designated healthservices"services” if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state.50
If our past or present operations are found to be in violation of any of these
"anti-kickback," "false“anti‑kickback,” “false claims," "self-referral"” “self‑referral” or other similar laws in foreign jurisdictions, we may be subject to the applicable penalty associated with the violation, which may include significant civil and criminal penalties, damages, fines, imprisonment and exclusion from healthcare programs. The impact of any such violations may lead to curtailment or restructuring of our operations, which could adversely affect our ability to operate our business and our financial results.Anti-corruptionAnti‑corruption laws. We are also subject to laws regarding the conduct of business overseas, such as theU.S. Foreign Corrupt Practices Act (FCPA),FCPA, the U.K. Bribery Act of 2010, the Brazil Clean Companies Act, and other similar laws in foreign countries in which we operate. The FCPA prohibits the provision of illegal or improper inducements to foreign government officials in connection with the obtaining of business overseas. Becoming familiar with and implementing the infrastructure necessary to ensure that we and our distributors comply with such laws, rules and regulations and mitigate and protect against corruption risks could be quite costly, and there can be no assurance that any policies and procedures we do implement will protect us against liability under the FCPA or related laws for actions taken by our employees, executive officers, distributors, agents and other intermediaries with respect to our business. Violations of the FCPA or other similar laws by us or any of our employees, executive officers, distributors, agents or other intermediaries could subject us or the individuals involved to criminal or civil liability, cause a loss of reputation in the market, and materially harm our business.Laws protecting patient health information. There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services
(HHS),(“HHS”) has promulgated patient privacy rules under the HIPAA. These privacy rules protect medical records and other personal health information of patients by limiting their use and disclosure, giving patients the right to access, amend and seek accounting of their own healthinformation and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. The HIPAA privacy standard was amended by the HITECH, enacted as part of the American Recovery and Reinvestment Act of 2009. Although we are not a
"covered entity"“covered entity” under HIPAA, we are considered a"business associate"“business associate” of certain covered entities and, as such, we are directly subject to HIPAA, including its enforcement scheme and inspection requirements, and are required to implement policies, procedures as well as reasonable and appropriate physical, technical and administrative security measures to protect individually identifiable health information we receive from covered entities. Our failure to protect health information received from customers in compliance with HIPAA or other laws could subject us to civil and criminal liability to the government and civil liability to the covered entity, could result in adverse publicity, and could harm our business and impair our ability to attract new customers.
Transparency laws. The Sunshine Act, which was enacted by Congress as part of the Patient Protection and Affordable Care Act on December 14, 2011, requires each applicable manufacturer, which includes medical device companies such as Accuray, to track and report to the federal government on an annual basis all payments and other transfers of value from such applicable manufacturer to U.S. licensed physicians and teaching hospitals as well as physician ownership of such applicable
manufacturer'smanufacturer’s equity, in each case subject to certain statutory exceptions. Such data will be made available by the government on a publicly searchable website. Failure to comply with the data collection and reporting obligations imposed by the Sunshine Act can result in civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum of $150,000 per reporting period) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum of $1 million per reporting period). In addition, we are subject to similar state and foreign laws related to the tracking and reporting of payments and other transfers of value to healthcare professionals, the violation of which could, among other things, result in civil monetary penalties and adversely impact our reputation and business.51
Conflict Minerals.The Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the SEC under such act require companies, including Accuray, to disclose the existence in their products of certain metals, including tantalum, tin, gold, tungsten and their derivatives, that originate from the Democratic Republic of the Congo and adjoining countries. Under these rules, we are required to obtain sourcing data from suppliers, perform supply chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. These requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of components used in our products. We may also encounter customers who require that all of the components of our products be certified as conflict free. If we are not able to meet this requirement, such customers may choose not to purchase our products, which could adversely impact sales of our products, and impact our results of operation. In addition, we have incurred and expect to incur additional costs to comply with these disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products.If we or our distributors do not obtain and maintain the necessary regulatory approvals in a specific country, we will not be able to market and sell our products in that country.
To be able to market and sell our products in a specific country, we or our distributors must comply with applicable laws and regulations of that country. In jurisdictions where we rely on our distributors to manage the regulatory process, we are dependent on their ability to do so effectively. While the laws and regulations of some countries do not impose barriers to marketing and selling our products or only require notification, others require that we or our distributors obtain the approval of a specified regulatory body. These laws and regulations, including the requirements for approvals, and the time required for regulatory review vary from country to country. The governmental agencies regulating medical devices in some countries, for example, require that the user interface on medical device
software be in the local language. We currently provide user guides and manuals, both paper copies and electronically, in the local language but only provide an English language version of the user interface. Obtaining regulatory approvals is expensive and
time-consuming,time‑consuming, and we cannot be certain that we or our distributors will receive regulatory approvals in each country in which we market or plan to market our products. If we modify our products, we or our distributors may need to apply for additional regulatory approvals before we are permitted to sell them. We may not continue to meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. It can also be costly for us and our distributors to keep up with regulatory changes issued or mandated from time to time. If we change distributors, it may betime-consumingtime‑consuming and disruptive to our business to transfer the required regulatory approvals, particularly if such approvals are maintained by ourthird-partythird‑party distributors on our behalf. If we or our distributors are unable to maintain our authorizations, or fail to obtain appropriate authorizations in a particular country, we will no longer be able to sell our products in that country, and our ability to generate revenue will be materially adversely affected.Within the European Union, we are required under the Medical Device Directive to affix the Conformité Européene, or CE, mark on our products in order to sell the products in member countries of the EU. This conformity to the applicable directives is done through
self-declarationself‑declaration and is verified by an independent certification body, called a Notified Body, before the CE mark can be placed on the device. Once the CE mark is affixed to the device, the Notified Body will regularly audit us to ensure that we remain in compliance with the applicable European laws or directives. CE marking demonstrates that our products comply with the laws and regulations required by the European Union countries to allow free movement of trade within those countries. If we cannot support our performance claims and/or demonstrate or maintain compliance with the applicable European laws and directives, we lose our CE mark, which would prevent us from selling our products within the European Union.Under the Pharmaceutical Affairs Law in Japan, a
pre-marketpre‑market approval necessary to sell, market and import a product, or Shonin, must be obtained from the Ministry of Health, Labor and Welfare(MHLW)(“MHLW”), for our products. Before issuing approvals, MHLW examines the application in detail with regard to the quality, efficacy, and safety of the proposed medical device. The Shonin is granted once MHLW is content with the safety and effectiveness of the medical device. The time required for approval varies. A delay in approval could prevent us from selling our products in Japan, which could impact our ability to generate revenue and harm our business.In addition to laws and regulations regarding medical devices, we are subject to a variety of environmental laws and regulations around the world regulating our operations, including those relating to the use, generation, handling, storage, transportation, treatment and disposal of hazardous materials, which laws impose compliance costs on our business and can also result in liability to us. Although we follow procedures intended to comply with existing environmental laws and regulations, risk of accidental contamination or injury can never be fully eliminated. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, future changes in these laws and regulations could also increase our costs of doing business. We must continually keep abreast of these standards and requirements and integrate our compliance into the development and regulatory documentation for our products. Failure to meet these standards could limit our ability to market our products in those regions that require compliance to such standards. For example, the
recast Directive on Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (the RoHS Directive), which began applyingEuropean Union has adopted directives that may lead tomedical devices in July 2014, bans placing new electrical and electronic equipmentrestrictions on theEU market containing more thanuse of certainspecified levelshazardous substances or other regulated substances in some oflead, mercury, cadmium, hexavalent chromium, polybrominated biphenyl or PBB and polybrominated diphenyl ether. Weour products sold there, unless such products are eligible for an exemption. While we believe thatthe RoHS Directive does not impose any restrictions on our products becausecertain of our products are exempt,as large scale fixed installations. The Notified Body which audits our compliance efforts has indicated that they share our view in this respect and that we are and will remain in compliance with the RoHS Directive because the RoHS Directive's restrictions do not apply to our products. Nevertheless,there can be no guarantee thatthe EU will not challengesuch determinationand, accordingly, we intend to comply withwould not be challenged or that theRoHS restrictions, whether orregulations would notthey apply, and arechange inthe process of updating thea way that would subject our productsare builtto such regulation. These directives, along witha view toward achieving such compliance gradually over time.other laws and regulations that may be adopted by other countries, could increase our operating costs in order to maintain access to certain markets, which could adversely affect our business.52
Healthcare reform legislation could adversely affect demand for our products, our revenue and our financial condition.
In March 2010, the Patient Protection and Affordable Care Act,
and theas amended by Health Care and Education Reconciliation Actof 2010(collectively, the “ACA”) were signed into law. TheAffordable Care Act (ACA)ACA provides for, among other things, a 2.3% excise tax on U.S. sales of medical devices, including our products, effective as of 2013. The excise tax was suspended for a two year period beginning January 1,2016. This2016 and was recently further suspended through December 31, 2019. If and when enacted, this tax burden may have a material, negative impact on our business, results of operations and cash flow. In addition,these two pieces of legislation includethe ACA includes a large number of other health related provisions, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians and teaching hospitals, modifying certain payment systems to encourage morecost-effectivecost‑effective care and a reduction of inefficiencies and waste and including new tools to address fraud and abuse. The laws also include a decrease in the annual rate of inflation for Medicare payments to hospitals and the establishment of an independent payment advisory board to suggest methods of reducing the rate of growth in Medicare spending.There continue to be many programs and requirements for which the details haveWe do not yetbeen fully established or consequences not fully understood, and it is unclear whatknow the full impact that the ACA will have on our business. The taxes imposed by the ACA and the expansion in the government's role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursement by third-party payors for our products, or reduced volume of medical procedures conducted with our products, all of which could have a material adverse effect on our business, financial condition and results of operations. The federal government may take further action regarding the ACA, including, but not limited to, repeal or replacement action. Most recently, the Tax Act was signed into law in December 2017, which, among other things, removed penalties for not complying with the individual mandate to carry health insurance. Additionally, all or a portion of the ACA and related subsequent legislationwill be.may be modified, repealed or otherwise invalidated through judicial challenge, which could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect our business.In addition, since the adoption of the Affordable Care Act, other legislation designed to keep federal healthcare costs down has been proposed or passed. For example, under the sequestration required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, Medicare payments for all items and services under Parts A and B incurred on or after April 1, 2013 have been reduced by up to 2%. Future federal legislation may impose further limitations on the coverage or amounts of reimbursement available for our products from governmental agencies or
third-partythird‑party payors. These limitations could have a negative impact on the demand for our products and services, and therefore on our financial position and results of operations.Since the enactment of the ACA, CMS continues its efforts to move away from
fee-for-servicefee‑for‑service payments for furnishing items and services in Medicare. In the past several rulemaking cycles, CMS has increased packaging policies and created larger payment bundles across the Medicare Hospital Outpatient Prospective Payment System(OPPS)(“OPPS”). One example isCMS'CMS’ expansion of Comprehensive Ambulatory Payment Classifications,(C-APCs),under which payment for adjunctive and secondary items, services and procedures are packaged into the most costly primary procedure at the claim level. Beyond the OPPS,CMS'CMS’ Innovation Center has launched a number of alternative payment model(APM)(“APM”) demonstrations that involveepisode-basedepisode‑based (i.e. bundled) payment. Since 2011, for example,CMMICenter for Medicare and Medicaid Innovation (“CMMI”) has createdorand is in the process of creating major federal initiatives to testepisode-basedepisode‑based payments, such as the Bundled Payments for Care Improvement,(BPCI),Oncology Care Model,(OCM), andSpecialty Practitioners Payment Model Opportunities. More recently, CMMI proposed a Radiation Oncology Model (“OM”), which would mandate selected radiotherapy providers to participate in a prospective, episode-based payments model where payment is based on a patient’s diagnosis as opposed to the traditional volume-based fee-for service payment model. It is unclear what impact, if any, such initiatives will have on our business and operating results, but any resulting decrease in reimbursement to our customers may result in reduced demand for our services.Furthermore,
the Patient Access and Medicare Protection Act (PAMPA) of 2015PAMPA froze payment for some radiation therapy delivery and related services, and requires CMS to provide a report to the U.S. Congress on the development of an APM for radiation therapy services provided innon-facilitynon‑facility settings. While these types of payment packaging policies andepisode-basedepisode‑based payments may impact reimbursement for overall patient care, including items and services furnished to patients, they also create incentives for providers to carefully assess the value proposition of technology purchases and uses. The impacts of these payment and delivery system changes are in their infancy and their overall effects remain under review.53
Future legislative or policy initiatives directed at reducing costs could be introduced at either the federal or state level. We cannot predict what healthcare reform legislation or regulations, if any, including any potential repeal or amendment of the ACA, will be enacted in the United States or elsewhere, what impact any legislation or regulations related to the
healthcare system that may be enacted or adopted in the future might have on our business, or the effect of ongoing uncertainty or public perception about these matters will have on the purchasing decisions of our customers. However, the implementation of new legislation and regulation may materially lower reimbursements for our products, materially reduce medical procedure volumes and significantly and adversely affect our business.
Regulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability to conduct our business.
The Dodd‑Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the SEC under such act require companies, including Accuray, to disclose the existence in their products of certain metals, known as “conflict minerals,” which are metals mined from the Democratic Republic of the Congo and adjoining countries. These rules requires investigative efforts, which has and will continue to cause us to incur associated costs, could adversely affect the sourcing, availability and pricing of minerals used in our products and may cause reputational harm if we determine that certain of our components contain such conflict minerals or if we are unable to alter our processes or sources of supply to avoid using such materials, all of which could adversely impact sales of our products and results of operations.
Risks Related to Our Common Stock
Our major stockholders own approximately 42.6% and directors and executive officers own approximately 2.9% of our outstanding common stock as of June 30, 2016, which could limit other stockholders' ability to influence the outcome of key transactions, including changes of control.As of June 30, 2016, our current holders of 5% or more of our outstanding common stock held in the aggregate approximately 42.6% of our outstanding common stock, while our directors and executive officers held in the aggregate approximately 2.9% of our outstanding common stock. This concentration of ownership may delay, deter or prevent a change of control of our company and will make some transactions more difficult or impossible without the support of these stockholders.The price of our common stock is volatile and may continue to fluctuate significantly, which could lead to losses for stockholders.
The trading prices of the stock of
high-technologyhigh‑technology companies of our size can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of these companies. Our stock price has experienced periods of volatility. Broad market fluctuations may also harm our stock price. Any negative change in thepublic'spublic’s perception of the prospects of companies that employ similar technology or sell into similar markets could also depress our stock price, regardless of our actual results.In addition to the other risk factors described above and below, factors affecting the trading price of our common stock include:
•regulatory developments related to manufacturing, marketing or sale of the CyberKnife or TomoTherapy Systems;
•political or social uncertainties;
•changes in product pricing policies;
•variations in our operating results, as well as costs and expenditures;
•announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors;
•changes in analysts’ estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ and our own estimates;
recruitment or departure of key personnel;
•changes in earnings estimates by analysts54
•
the performance of our competitors and investor perception of the markets and industries in which we compete;
announcement of strategic transactions or
changes in accounting policies;capital raising activities; and•market conditions in our industry, the industries of our customers and the economy as a whole.
The sale of material amounts of common stock by our stockholders could encourage short sales by third parties and depress the price of our common stock.
The downward pressure on our stock price caused by the sale of a significant number of shares of our common stock, or the perception that such sales could occur, by any of our significant stockholders could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock.
Future issuances of shares of our common stock could dilute the ownership interests of our stockholders.
Any issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading price of our common stock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions), to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding options or for other reasons.
In August
2011,2017, we issued$100$85.0 million aggregate principal amount of our 3.75% Convertible Senior Notes dueAugust 1, 20162022 (the3.75%“3.75% ConvertibleNotes)Notes”) under an indenture between us and The Bank of New York Mellon Trust Company, N.A.,and in February 2013, we issued $115 million aggregate principal amount of our 3.50% Convertible Senior Notes due February 1, 2018 (the 3.50% Convertible Notes). In April 2014, we issued approximately $70.3 million aggregate principal amount of our 3.50% Series A Convertible Senior Notes due February 1, 2018 (the 3.50% Series A Convertible Notes, and collectively with the 3.75% Convertible Notes and the 3.50% Convertible Notes, the Convertible Notes) and paid approximately $0.4 million in cash to refinance approximately $70.3 million aggregate principal amount of our 3.50% Convertible Notes. Following such transactions, approximately $44.7as trustee. $53.0 million aggregate principal amount of the3.50%3.75% Convertible Notesremained outstanding.were issued to certain holders of our outstanding Existing Notes in exchange for approximately $47.0 million aggregate principal amount of the Existing Notes (the “Exchange”) and $32.0 million aggregate principal amount of the 3.75% Convertible Notes were issued to certain other qualified new investors for cash. The net proceeds of the cash issuance were used to repurchase approximately $28.0 million of Existing Notes. In February 2018, we paid $40.2 million in cash to settle outstanding principal and accrued interest, and issued 254,000 shares of our common stock to retire the Existing Notes. To the extent we issue common stock upon conversion of any outstandingConvertible Notes,convertible notes, that conversion would dilute the ownership interests of our stockholders.Increased leverage as a result of the Convertible Notes offering may harm our financial condition and operating results.As of June 30, 2016, we had total consolidated liabilities of approximately $409.4 million, including the short-term liability component of the 3.75% Convertible Notes in the amount of $36.4 million and the Term Loan of $3.5 million, and the long-term liability component of the 3.50% Convertible Notes in the amount of $43.2 million and the 3.50% Series A Convertible Notes of $66.6 million as well as the Term Loan in the amount of $60.7 million.In April 2014, we refinanced approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes held by certain investors (the Participating Holders) with approximately $70.3 million aggregate principal amount of the 3.50% Series A Convertible Notes. In connection with such transactions, we also paid the Participating Holders approximately $0.4 million in cash.On January 11, 2016, the Company closed a $70.0 million debt financing agreement with Cerberus Business Finance, LLC, an affiliate of Cerberus Capital Management, L.P (the Secured Loan). The net proceeds of the loan are required to be used, in addition to $30.0 million of cash funded by the Company, to retire $100.0 million of Convertible Notes at the earlier of August 2016 or when otherwise redeemed. This financing consists of a $70.0 million first lien senior secured term loan with a 700 basis point margin and 1 percent LIBOR floor. The loan principal amount will be amortized at an effective rate of 5% annually with final payment due in 5 years and is subject to certain maintenance-based covenants. The Secured Loan also includes certain financial covenants, customary events of default, and other customary covenants that limit, among other things, the ability of the Company and its subsidiaries to (i) incur indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their assets, (v) make certain loans or investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain indebtedness and (viii) enter into transactions with affiliates, in each case subject to certain exceptions. As required by the terms of the financing, upon the closing of the financing in January 2016, we used a portion of the net proceeds from the financing to repurchase approximately $63.4 million in aggregate principal amount of the 3.75% Convertible Notes for $66.6 million in cash. In August 2016, we settled the remaining approximately $36.6 million in aggregate principal amount of the 3.75% Convertible Notes and accrued interest for $37.3 million in cash.Our level of indebtedness could have important consequences to stockholders and note holders, because:•it could affect our ability to satisfy our obligations under the Convertible Notes;•a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes;•it may impair our ability to obtain additional financing in the future;•it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and•it may make us more vulnerable to downturns in our business, our industry or the economy in general.
The conditional conversion features of the
3.50% Series A3.75% Convertible Notes, if triggered, may adversely affect our financial condition and operating results.In the event the conditional conversion features of the
3.50% Series A3.75% Convertible Notes are triggered, holders of the3.50% Series A3.75% Convertible Notes, as applicable, will be entitled to convert such notes at any time during specified periods at their option. If one or more holders elect to convert such notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying solely cash in lieu of any fractional share), including if we have irrevocably elected full physical settlement upon conversion, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on the applicable conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert such notes, if we have irrevocably elected net share settlement upon conversion we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of such notes as a current rather thanlong-termlong‑term liability, which could result in a material reduction of our net working capital.The 3.50% Convertible Notes do not provide for such a conditional conversion feature.55Provisions in the indenture for the 3.75% Convertible Notes, the credit agreement for our Revolving Credit Facility, our certificate of incorporation and our bylaws could discourage or prevent a takeover, even if an acquisition would be beneficial in the opinion of our stockholders.
Provisions of our certificate of incorporation and bylaws could make it more difficult for a
third-partythird‑party to acquire us, even if doing so would be beneficial in the opinion of our stockholders. These provisions include:•authorizing the issuance of
"blank check"“blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;•establishing a classified board of directors, which could discourage a takeover attempt;
•prohibiting cumulative voting in the election of directors, which would limit the ability of less than a majority of stockholders to elect director candidates;
•limiting the ability of stockholders to call special meetings of stockholders;
•prohibiting stockholder action by written consent and requiring that all stockholder actions be taken at a meeting of our stockholders; and
•establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change of control of our company. Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following the date that the stockholder became an interested stockholder of such subject company without approval of the board or 662/3% of the independent stockholders. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
A change of control will also trigger an event of default under
our term loan credit facility.the Revolving Credit Facility. If an event of default occurs, thecollateralagent for the lenders under the Revolving Credit Facility may, at its discretion, suspend or terminate any of the lenders’ loan obligations thereunder and/or declare all or any portion of the loanthen-outstandingthen‑outstanding under theloan credit facility,Revolving Credit Facility, including all accrued but unpaid interest thereon,applicable fees and early payment premiums,to be accelerated and immediately due and payable.Furthermore, if a
"fundamental change"“fundamental change” (as suchterms areterm is defined ineachtheindenturesindenture of the 3.75% Convertible Notes) occurs, holders of the 3.75% Convertible Notes will have the right, at their option, to require us to repurchase all or a portion of theirConvertible Notes.convertible notes. A"fundamental change"“fundamental change” generally occurs when there is a change in control of Accuray (acquisition of 50% or more of our voting stock, liquidation or sale of Accuray not forstock)stock in another publicly traded company) or trading of our stock is terminated. In the event of a"make-whole“make‑whole fundamentalchange"change” (as such term is defined ineachthe indenture of theindentures for the3.75% Convertible Notes), we may also be required to increase the conversion rate applicable to the 3.75% Convertible Notes surrendered for conversion in connection with suchmake-wholemake‑whole fundamental change. A"make-whole“make‑whole fundamentalchange"change” is generally a sale of Accuray not for stock in another publicly traded company. In addition,each oftheindenturesindenture for the 3.75% Convertible Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the 3.75% Convertible Notes.We have not paid dividends in the past and do not expect to pay dividends in the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, and other factors our board of directors may deem relevant. If we do not pay dividends, a return on a
stockholders'stockholders’ investment will only occur if our stock price appreciates.56
Item 1B.
UNRESOLVEDUNRESOLVED STAFF COMMENTSNone.
Facilities
We currently lease approximately
164,000124,000 square feet of product developmentmanufacturingand administrative space inthreetwo buildings in Sunnyvale, California, as follows:•A
manufacturingheadquarters buildingtotalingthat is approximately50,00074,000 square feet, which isleased to us until December 2018; and•Two headquarters buildings that are approximately 74,000 square feet and 40,000 square feet, respectively, which areleased to us until December 2023. We have the right to renew the lease term of our headquarters officebuildingsbuilding for twofive-yearfive‑year terms upon prior written notice and the fulfillment of certainconditions.Our wholly owned subsidiary, TomoTherapy Incorporated leasesA research and development facility totaling approximately153,00050,000 square feet, which is leased to us until December 2023.
We also lease approximately 197,000 square feet of product development, manufacturing, administrative and
administrativewarehouse space inthreefive buildings in Madison, Wisconsin, as follows:•An office building totaling approximately 61,000 square feet, which is leased to
TomoTherapyus until June2018;•- 2025;
A manufacturing facility totaling approximately 56,000 square feet, which is leased to
TomoTherapyus until June2018;2025; and•A portion of a warehouse buildingWarehouse and office space in three buildings totaling approximately
36,00080,000 square feet, whichisare leased toTomoTherapyus through various dates untilApril 2019.July 2020.Our wholly owned subsidiary, Accuray International
Sarl,Sàrl, leasestwoone officebuildings totalingbuilding that consists of approximately15,00021,000 square feet of administrative space in Morges, Switzerland, which are leased to Accuray International untilJune 30, 2018.December 2024.In addition, our
wholly-ownedwholly‑owned subsidiary, Accuray Accelerator Technology Company Limited, leases approximately26,00042,000 square feet of space in a manufacturing facility in Chengdu, China untilJuly 2017.November 2019.We, directly or through our subsidiaries, also maintain offices in: Pittsburgh, Pennsylvania; Durham, North Carolina;
France;Solon, Ohio; China; Hong Kong; Japan; Spain; India; Russia; Germany;Belgium;Brazil; and the United Arab Emirates.We believe our current facilities are adequate to meet our current needs, but additional space, including additional radiation shielded areas in which systems can be assembled and tested, may be required in the future to accommodate anticipated increases in manufacturing needs.
Refer to Note
7,9, Commitments and Contingencies, to the Consolidated Financial Statements for a description of certain legal proceedings currently pending against the Company. From time to time we are involved in legal proceedings arising in the ordinary course of our business.Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. MARKET FOR
REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESStock Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol
"ARAY." The high and low sale prices for each quarterly period during our fiscal years ended June 30, 2016 and 2015 are as follows:“ARAY.”High Low Year ended June 30, 2016
First Quarter
$ 7.37 $ 4.87 Second Quarter
$ 7.54 $ 4.80 Third Quarter
$ 6.75 $ 4.83 Fourth Quarter
$ 6.33 $ 4.86 Year ended June 30, 2015
First Quarter
$ 9.25 $ 7.24 Second Quarter
$ 7.64 $ 5.99 Third Quarter
$ 9.51 $ 6.53 Fourth Quarter
$ 10.01 $ 5.84 We have never paid cash dividends on our common stock. Our Board of Directors intends to use any future earnings to support operations and reinvest in the growth and development of our business. There are no current plans to pay cash dividends to common stockholders in the foreseeable future.
As of August 15,
2016,2019, there were230152 registered stockholders of record of our common stock. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders and believe the number of registered stockholders of record underestimates our total number of stockholders.During the year ended June 30,
2016,2019, there were no sales of unregistered equity securities by us other than those transactions previously reported to theCompany.Securities and Exchange Commission (SEC) on our Current Reports on Form 8-K.In January 2016 and August 2016, the Company repurchased approximately $63.4 million and $36.6 million, respectively, in aggregate principal amount of its 3.75% Convertible Senior Notes due August 2016 for approximately $103.9 million in cash. As $100.0 million of the 3.75% Convertible Senior Notes were settled in cash, the Company avoided the issuance of approximately 10.6 million new common equity shares, representing a potential dilution of approximately 13 percent of its common stock as of June 30, 2016.The Company doesWe do not have a stock repurchase program andhashave not made any share repurchaseexcluding repurchases to satisfy minimum tax withholdings,during the year ended June 30,2016.2019.See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance under our equity compensation plans.
58
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on our common stock between June 30,
20112014 and June 30,2016,2019, with the cumulative total return of (i) the S&P Healthcare Index and (ii) the Nasdaq Composite Index, over the same period. This graph assumes the investment of $100.00 on June 30,20112014 in our common stock, the S&P Healthcare Index and the Nasdaq Composite Index, and assumes the reinvestment of dividends, if any.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Accuray Incorporated, the NASDAQ Composite Index and the S&P Health Care Index
*$6/14 6/15 6/16 6/17 6/18 6/19 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 Accuray Incorporated NASDAQ Composite S&P Health Care *$100 invested on 6/30/1114 in stock or index, including reinvestment of dividends.
The comparisons shown in the graph above are based upon historical data. We caution that the stock price performance shown in the graph above is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from Research Data Group, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.
Item 6.
SELECTEDSELECTED FINANCIAL DATAThe following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and related notes and
"Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” appearing elsewhere in this Form10-K.10‑K. The consolidated statements of operations for the years ended June 30,2016, 20152019, 2018 and2014,2017, and the consolidated balance sheet data at June 30,20162019 and20152018 are derived from, and are qualified by reference to, the consolidated financial statements that have been audited by our independent registered public accounting firm, which are included elsewhere in this Form10-K.10‑K. The consolidated statements of operations data for the years ended June 30,20132016 and20122015 and the consolidated balance sheet data at June 30,2014, 20132017, 2016 and20122015 is derived from our audited consolidated financial statements not included in this Form10-K.10‑K.Years Ended June 30,
2019
2018
2017
2016
2015
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenue
$
418,785
$
404,897
$
383,414
$
398,800
$
379,801
Cost of revenue
256,134
243,202
242,073
240,087
234,399
Gross profit
162,651
161,695
141,341
158,713
145,402
Operating expenses:
Research and development
56,493
57,251
49,921
56,652
55,752
Selling and marketing
55,998
60,105
57,477
56,812
62,440
General and administrative
49,577
48,136
43,766
50,122
46,379
Total operating expenses
162,068
165,492
151,164
163,586
164,571
Income (loss) from operations
583
(3,797
)
(9,823
)
(4,873
)
(19,169
)
Other expense, net
(14,927
)
(19,224
)
(18,718
)
(18,295
)
(18,621
)
Loss before provision for income taxes
(14,344
)
(23,021
)
(28,541
)
(23,168
)
(37,790
)
Provision for income taxes
2,086
878
1,038
2,336
2,419
Loss from continuing operations
(16,430
)
(23,899
)
(29,579
)
(25,504
)
(40,209
)
Loss per share attributable to stockholders
Net loss per share—basic and diluted
$
(0.19
)
$
(0.28
)
$
(0.36
)
$
(0.32
)
$
(0.51
)
Weighted average common shares used in
computing net loss per share
Basic and diluted
87,465
84,893
82,495
80,509
78,277
As of June 30,
2019
2018
2017
2016
2015
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents
$
76,798
$
83,083
$
72,084
$
119,771
$
79,551
Investments
$
—
$
—
$
23,909
$
47,239
$
64,306
Working capital
$
151,894
$
114,723
$
24,511
$
151,468
$
184,414
Total assets
$
438,181
$
378,727
$
406,464
$
469,033
$
466,773
Long-term debt
$
159,844
$
131,077
$
51,548
$
170,512
$
199,655
Total stockholders’ equity
$
49,871
$
48,632
$
46,533
$
59,660
$
75,780
Years Ended June 30, 2016 2015 2014 2013(1) 2012(1) (in thousands, except per share data) Consolidated Statements of Operations Data:
Net revenue
$ 398,800 $ 379,801 $ 369,419 $ 315,974 $ 409,223 Cost of revenue
240,087 234,399 226,619 218,334 271,951 Gross profit
158,713 145,402 142,800 97,640 137,272 Operating expenses:
Research and development
56,652 55,752 53,724 66,197 81,287 Selling and marketing
56,812 62,440 61,885 54,372 54,547 General and administrative
50,122 46,379 45,335 57,726 57,672 Total operating expenses
163,586 164,571 160,944 178,295 193,506 Loss from operations
(4,873 ) (19,169 ) (18,144 ) (80,655 ) (56,234 ) Other expense, net
(18,295 ) (18,621 ) (14,216 ) (13,133 ) (12,521 ) Loss before provision for income taxes
(23,168 ) (37,790 ) (32,360 ) (93,788 ) (68,755 ) Provision for income taxes
2,336 2,419 3,088 3,573 2,595 Loss from continuing operations
(25,504 ) (40,209 ) (35,448 ) (97,361 ) (71,350 ) Loss from operations of a discontinued variable interest entity
— — — (3,505 ) (7,103 ) Impairment of indefinite lived intangible asset of discontinued variable interest entity
— — — (12,200 ) — Loss from deconsolidation of a variable interest entity
— — — (3,442 ) — Loss from discontinued operations, net of tax of $0
— — — (19,147 ) (7,103 ) Loss from discontinued operations attributable to non-controlling interest
— — — (13,289 ) (6,411 ) Loss from discontinued operations attributable to stockholders
— — — (5,858 ) (692 ) Loss attributable to stockholders
$ (25,504 ) $ (40,209 ) $ (35,448 ) $ (103,219 ) $ (72,042 ) Loss per share attributable to stockholders
Basic—continuing operations
$ (0.32 ) $ (0.51 ) $ (0.47 ) $ (1.33 ) $ (1.01 ) Diluted—continuing operations
$ (0.32 ) $ (0.51 ) $ (0.47 ) $ (1.33 ) $ (1.01 ) Basic—discontinued operations
$ — $ — $ — $ (0.08 ) $ (0.01 ) Diluted—discontinued operations
$ — $ — $ — $ (0.08 ) $ (0.01 ) Basic—net loss
$ (0.32 ) $ (0.51 ) $ (0.47 ) $ (1.41 ) $ (1.02 ) Diluted—net loss
$ (0.32 ) $ (0.51 ) $ (0.47 ) $ (1.41 ) $ (1.02 ) Weighted average common shares used in computing loss per share
Basic
80,509 78,277 75,804 73,281 70,887 Diluted
80,509 78,277 75,804 73,281 70,887
60As of June 30, 2016 2015 2014 2013(1) 2012(1) (in thousands) Consolidated Balance Sheet Data:
Cash and cash equivalents
$ 119,771 $ 79,551 $ 92,346 $ 73,313 $ 143,504 Investments
$ 47,239 $ 64,306 $ 79,553 $ 101,084 $ — Working capital
$ 151,468 $ 184,414 $ 179,901 $ 180,076 $ 142,084 Total assets
$ 469,033 $ 466,773 $ 495,188 $ 475,929 $ 473,170 Long-term debt
$ 170,512 $ 199,655 $ 195,612 $ 198,768 $ 79,466 Total stockholders' equity
$ 59,660 $ 75,780 $ 98,548 $ 106,835 $ 195,625 (1)On December 21, 2012, we entered into a Purchase Agreement and Release with Compact Particle Acceleration Corporation (CPAC), under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement and Release, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of December 21, 2012. The results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded for the years ended June 30, 2013 and 2012 have been reported as discontinued operations.
Item 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSISOFOF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains
forward-lookingforward‑looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in theforward-lookingforward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form10-K,10‑K, particularly in"Risk“Risk Factors."” See"Special“Special Note RegardingForward-LookingForward‑Looking Statements."”Overview
Products and Markets
Company
We are a radiation oncology company that develops, manufactures, sells and supports precise, innovative treatment solutions
whichthat set the standard of care, with the aim of helping patients live longer, better lives. Ourleading edgeleading-edge technologies, the CyberKnife and TomoTherapy Systems, including the Radixact Systems, the next generation TomoTherapy platform, are designed to deliver advanced radiation therapy including radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy,image guidedimage-guided radiation therapy and adaptive radiation therapy tailored to the specific needs of each patient. The CyberKnife and TomoTherapy Systems are complementary offerings serving largely separate patient populations treated by the same medical specialty, radiationoncology, withoncology. Both systems have advanced capabilities that offer increased treatment flexibility to meet the needs of an expanding patientpopulation.population including patients requiring retreatment with radiation therapy and palliative care. We also offer comprehensive software solutions to enable and enhance the precise and efficient radiosurgery and radiotherapy treatment with our CyberKnife and TomoTherapy Systems. In addition to these products, we also provide services, which include post-contract customer support (warranty period services and post warranty services), installation services, training, and other professional services.The CyberKnife Systems
The CyberKnife Systems are robotic systems designed to deliver radiosurgery treatments to cancer tumors anywhere in the body. The CyberKnife Systems are the only dedicated, full-body robotic radiosurgery systems on the market. Radiosurgery is an alternative to traditional surgery for tumors and is performed on an outpatient basis in one to five treatment sessions. It enables the treatment of patients who typically might not otherwise
would notbe treated with radiation, who may not be good candidates for surgery, or who desire non-surgical treatments. The use of radiosurgery with CyberKnife Systems totreat tumors throughout the body has grown significantly in recent years, but currently
representsonly a small portion of the patients who develop tumors treatable with CyberKnifeSystems.Systems are treated with these systems. A determination of when it may or may not be appropriate to use a CyberKnife System for treatment is at the discretion of the treating physician and depends on the specific patient. However,theCyberKnife Systems are generally not used to treat (1) very large tumors, which are considerably wider than the radiation beam that can be delivered by CyberKnife Systems, (2) diffuse wide-spread disease, as is often the case for late stage cancers, because they are not localized (though CyberKnife Systems might be used to treat a focal area of the disease), and (3) systemic diseases, like leukemia and lymphoma, which are not localized to an organ, but rather involve cells throughout the body.The addition of the InCise MLC in 2013, now makes it faster and more efficient to treat a wider range of tumor types with the CyberKnife M6, including larger tumors and those with multiple sites of disease.Our CyberKnife M6 Series Systems have the option of: fixed collimator, Iris Variable Aperture Collimator and/or multi-leaf collimator,
and/or InCise MLC. The InCise MLC is designed specifically for the M6 Series. Withthe addition ofthe InCise MLC, clinicians can deliver the same precise radiosurgery treatments they have come to expect with the CyberKnife System, faster and for a wider range of tumortypes.types than prior CyberKnife Systems. The InCise MLCwas commercially launchedmakes it faster and more efficient to treat a wider range of tumor types with the CyberKnife M6 Series System, including larger tumors and those with multiple sites of disease.61
Most recently, we introduced the VOLO Optimizer software upgrade for the CyberKnife System. The VOLO facilitates the development of clinically optimal treatment plans up to 90 percent faster than before and the delivery of the treatment up to an estimated 50 percent faster than before, allowing CyberKnife treatments to typically be performed in
the third fiscal quarter of 2015.15 to 30 minutes.We believe the
long termlong-term success of the CyberKnife Systems is dependent on a number of factors including the following:•Continued adoption of our CyberKnife M6 Series Systems;
•Production and shipment of MLC that meets the standards that we, and our customers, expect in our products;•Change in medical practice leading to utilization of stereotactic body radiosurgery more regularly as an alternative to surgery or other treatments;•Greater awareness among doctors and patients of the benefits of radiosurgery conducted with the CyberKnife Systems;
•Continued evolution in clinical studies demonstrating the safety, efficacy and other benefits of using the CyberKnife Systems to treat tumors in various parts of the body;
•Change in medical practice leading to utilization of stereotactic body radiosurgery more regularly as an alternative to surgery or other treatments;
Continued advances in our technology that improve the quality of treatments and ease of use of the CyberKnife Systems;
•ImprovedReceipt of regulatory approvals in various countries which are expected to improve access to radiosurgery with the CyberKnife Systems in
various countries through regulatory approvals;•- such countries;
Medical insurance reimbursement policies that cover CyberKnife System treatments; and
•Expansion ofOur ability to expand sales of CyberKnife Systems in countries throughout the
world.world where we do not currently sell or have not historically sold a significant number of CyberKnife Systems.TomoTherapy Systems, including Radixact, the next generation TomoTherapy platform
The TomoTherapy Systems are advanced, fully integrated and versatile radiation therapy systems for the treatment of a wide range of cancer types. The TomoTherapy Systems are
the only radiation therapy systemsspecifically designed for image-guided intensity-modulated radiation therapy(IG-IMRT)(“IG-IMRT”). The TomoTherapy Systems include the TomoTherapy H Series Systemscome inwith configurations of TomoH, TomoHD, and TomoHDA. Based on a CT scanner platform, the systems provide continuous delivery of radiation from 360 degrees around the patient, or delivery from clinician-specified beam angles. These unique features, combined with daily 3D image guidance, enable physicians to deliver highly accurate, individualized dose distributions which precisely conform to the shape of thepatient'spatient’s tumor while minimizing dose to normal, healthy tissue, resulting in fewer side effects forpatients.the patient. The TomoTherapy Systems are capable of treating all standard radiation therapy indications including breast, prostate, lung, and head and neck cancers, in addition to complex and novel treatments such as total marrow irradiation.Radiation therapy has been widely availableThe Radixact System, the next generation TomoTherapy platform, includes our integrated Accuray Precision treatment planning software andused in developed countriesnew iDMS Data Management System. The Radixact System leverages the TomoTherapy System’s efficient daily low-dose fan beam MVCT image guidance and unique ring gantry architecture, delivering precise radiation treatments fordecades, though many developing countries do notmore patients, faster, with simpler, more automated workflows.Most recently, Accuray introduced its Synchrony motion tracking and correction technology for the Radixact System. This feature adds intrafraction motion synchronization capabilities to the Radixact System, enabling real-time tracking, visualization and correction for tumor motion during treatment, with the goal of
Contentscurrently have a sufficient number ofimproving dose accuracy and treatment times compared to conventional radiation therapysystemssystems. We expect toadequately treat their domestic cancer patient populations. The numbership Synchrony for Radixact to selected clinical evaluation sites globally through the end ofradiation therapy systemscalendar year 2019, with broader commercial launch inuse and sold eachearly calendar yearis currently many times larger than the number of radiosurgery systems.2020.62
We believe the Radixact System and other TomoTherapy Systems offer clinicians and patients significant benefits over other radiation therapy systems in the market. We believe our ability to capture more sales will be influenced by a number of factors including the following:
•Continued adoption of our TomoTherapy
H Series Systems;•- Systems, including the adoption of Radixact Systems in markets where it is available;
Greater awareness among doctors and patients of the unique benefits of radiation therapy using TomoTherapy
Systems;•- Systems because of their ring gantry architecture and ability to deliver treatment from 360 degrees around the patient;
Advances in our technology
whichthat improve the quality of treatments and ease of use of TomoTherapy Systems;•Greater awareness among doctors of the now-established reliability of TomoTherapy Systems; and
•ExpansionOur ability to expand sales of TomoTherapy
System salesSystems in countries throughout theworld.world where we do not currently sell or have not historically sold a significant number of TomoTherapy Systems.In 2016Adoption of ASC 606
At the beginning of our fiscal year 2019, we
received FDA and CE Mark approval foradopted the newRadixact Treatment Delivery Platform. We also received 510(k) clearancerevenue recognition standard ASC 606, Revenues from Contracts with Customers and applied the modified retrospective method. All financial statements and disclosures forour new treatment planningperiods beginning anddata management systems, Accuray Precision Treatment Planning Systemsubsequent to July 1, 2018, have been adjusted to comply with ASC 606. See Note 1. The Company andiDMS Data Management System. These next generation hardwareits Significant Accounting Policies, Note 2. Recent Accounting Pronouncements, andsoftware solutions which, together, make up the new Radixact System, enable faster, more efficient delivery of extremely precise treatment to a wider range of cancer patients, including those undergoing retreatment. The new Radixact System represents a major step forward in the evolutionNote 3. Revenue of theTomoTherapy System in treatment speed and ease of use.Notes to the consolidated financial statements, for additional information.Sale of Our Products
Generating revenue from the sale of our systems is a lengthy process. Selling our systems, from first contact with a potential customer to a signed sales contract that meets our backlog criteria (as discussed below) varies significantly and generally spans between six months
toand two years. The length of timefrombetween receipt of a signed contracttoand revenue recognition is generally governedgenerallyby the time required by the customer to build, renovate or prepare the treatment room for installation of the system.In the United States, we primarily market directly to customers, including hospitals and stand-alone treatment facilities, through our sales organization and we also market to customers through sales agents and group purchasing organizations. Outside the United States, we market to customers directly and through distributors and
somesales agents.WeIn addition to our offices in the United States, we have sales and service offices inmany countriesEurope, Asia, and South America.Joint Venture
In January 2019, our wholly-owned subsidiary, Accuray Asia Limited (“Accuray Asia”), entered into an agreement with CNNC High Energy Equipment (Tianjin) Co., Ltd. (the “CIRC Subsidiary”), a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture, CNNC Accuray (Tianjin) Medical Technology Co. Ltd. (the “JV”), to manufacture and sell radiation oncology systems in
Europe, JapanChina. The JV aims to be uniquely positioned to serve China, the world’s largest growth market for radiation oncology systems. China represents a significantly underserved market for linacs based on the country’s population andother countriescancer incidence rates on both an absolute and relative country basis. Accuray Asia initially has a 49% ownership interest in the JV and the CIRC Subsidiary initially has a 51% ownership interest in the joint venture.In exchange for the initial 49% equity interest in the JV, we, through Accuray Asia,
South America,expect to make our initial capital contribution to the JV in stages, to be completed by December 31, 2019 in the form of in-kind contributions consisting of components for two full radiation oncology systems from our inventory. Any remaining amount of capital contributions due, if not satisfied by such in-kind contributions, will be made by us, through Accuray Asia, in accordance with the schedule set by the board of directors of the JV.63
In July 2019, the JV broke ground on its facilty based in Tianjin, China, expected to serve as headquarters and
throughouthome of theworld.Backlogsales organization and service operations. Also in July 2019, the JV received the Radiation Safety License from the China Ministry of Environmental Protection. This license, along with the license to do business in China received in April 2019 and the Medical Device Operating Permit received in June 2019, enables the JV to sell and install our radiation therapy devices in China.For ordersWith the receipt of the necessary permits and licenses to operate, the JV has begun selling products in China, much like a distributor. In the long term, we anticipate that
coverthe JV will manufacture and sell a locally branded “Made in China” radiotherapy device in the Class B license category, which would replace our current offering in that category. We believe this strategy will allow us to best maximize bothproductsnear andservices, onlylonger-term opportunities in China.We are assessing the accounting treatment of our investment in the JV and expect to apply the equity method of accounting to the ownership interest in the JV as we have the ability to exercise significant influence over the JV but lack controlling financial interest and are not the primary beneficiary. We will recognize revenue on sales to the JV in the current period, eliminating a portion of profit to the extent goods sold have not been sold through by the JV to an end customer at the end of each reporting period. We will recognize the 49% proportionate share of the JV income or loss on a one-quarter lag due to the timing of the availability of the JV’s financial records.
Effective at the beginning of our fiscal year 2019, we updated our backlog policy to include certain upgrades sold through service contracts. As a result, the portion of the order that is recognizable as product revenue
isand upgrades sold on service contracts are reported as backlog. The portion of the order that is recognized as other service revenue (for example,Post ContractPost-Contract Customer Support (PCS), installation, training and professional services) is not included in reported backlog.Product backlog totaled $405.9 million asAs of June 30,2016.2019, backlog totaled $495.6 million, of which $1.0 million represented upgrades sold through service contracts. As of June 30, 2018, backlog totaled $478.5 million.In order for the product portion of a system sales agreement to be counted as backlog, it must meet the following criteria:
•The contract is
signed andproperly executed by both the customer and us. A customer purchase order thatis signed andincorporates the terms of our contract quote will be considered equivalent to a signed and executedcontract;•- contract. The contract has either cleared all its contingencies or contained no contingencies when signed;
•
We have received a minimum deposit or a letter of credit; or the sale is to a
direct channelcustomer where a deposit is deemed not necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals orthe productcancer care group that hasshipped to a customersufficient credit, customers withcredit sufficient to cover the minimum deposit;•- trade-in of existing equipment, sales via tender awards, or indirect channel sales that have signed contracts with end-customers);
The specific end customer site has been identified by the customer in the written contract or written amendment;
•For orders in our Latin America region, unless the system has already shippedandcollection is reasonably assured, we request supporting evidence that the end customer has commenced construction to place our products if the site does not already exist; and•Less than 2.5 years have passed since the contract met all the criteria above.
Although our backlog includes only contractual agreements with our customers for the purchase of
systemsCyberKnife Systems, TomoTherapy Systems, including Radixact Systems and related upgrades, we cannot provide assurance that we will convert backlog into recognized revenue due primarily to factors outside of our control.OurThe amount of backlog recognized into revenue is primarily impacted by three items: cancellations, age-outs and foreign currency fluctuations. Orders could be cancelled for reasons including, without limitation, changes incustomers'customers’ needs or financial condition, changes in government or health insurance reimbursement policies, or changes to regulatory requirements. In addition to cancellations, after 2.5 years, if we have not been able to recognize revenue on a contract, we remove the revenue associated with the contract from backlog and the order is considered aged out. Contracts mayage outage-out for many reasons, including but not limited to, inability of the customer to pay, inability of the customer to adapt their facilities to accommodate our products in a timely manner, or inability to timely obtain licenses necessary for customer facilities or operation of our equipment. Our backlog also includes amounts not denominated in U.S. Dollars and therefore fluctuations in the U.S. Dollar as compared to other currencies will impactbacklog.revenue. Generally, strengtheninginof the U.S. Dollar will negatively impactbacklog.revenue. Backlog is stated at historical foreign currency exchange rates, and revenue is released from backlog at current exchange rates, with any difference recorded as a backlog adjustment.64
A summary of gross orders, net orders, and order backlog is as follows (in thousands):
Years Ended June 30,
2019
2018
2017
Gross orders
$
342,321
$
304,903
$
298,348
Net age-outs
(95,463
)
(68,463
)
(57,600
)
Cancellations
(25,012
)
(22,610
)
(13,835
)
Currency impacts and other
(3,583
)
(4,296
)
(354
)
Net orders
$
218,263
$
209,534
$
226,559
Order backlog at the end of the period
$
495,627
$
478,482
$
452,846
Gross Orders
Gross orders are defined as the sum of new orders recorded during the period adjusted for any revisions to existing orders during the period.
Net product orders are defined as gross product orders less cancellations, age-outs and foreign exchange adjustments.Years ended June 30, (Dollars in thousands) 2016 2015 2014 Gross orders
$ 283,853 $ 267,777 $ 263,352 Net orders
$ 224,253 $ 188,997 $ 221,018 Order backlog at the end of the period
$ 405,900 $ 375,028 $ 364,742 Gross orders increased by
$16.1$37.4 million for the year ended June 30,2016,2019, as compared to the year ended June 30,2015.2018. This was primarily a result of an increase of $31.6 million in new system order volume compared to the same prior year period, primarily related to a $17.5 million increase of TomoTherapy System orders, particularly Radixact System orders, a $14.1 million increase in CyberKnife System orders and an increase of $5.8 million in upgrade orders and other amendments to the terms of our contracts as compared to the same prior year period.Gross orders increased by
$4.4$6.5 million for the year ended June 30,2015,2018, as compared to the year ended June 30,2014. These increases were due to increased2017. This was primarily a result of an increase of $7.7 million in new system order volume compared to the same prior yearover year. In fiscal 2016,period, primarily driven by a $17.3 million increase of TomoTherapy Systemorder volume increased 11% year over year andorders driven by Radixact System, which was introduced in the second half of fiscal 2017, offset by a $9.6 million decrease in CyberKnife Systemorder volume increased 13%orders. The increase was also offset by a $1.2 million decrease in upgrade orders and other amendments to the terms of our contracts as compared to the same prior yearover year. In fiscal 2015, TomoTherapy System order volume increased 17% year over yearperiod.Net Orders
Net orders are defined as gross orders less cancellations, age-outs, foreign exchange and
CyberKnife System order volume increased 12% year over year.other adjustments during the period.Net orders increased by
$35.3$8.7 million for the year ended June 30,2016,2019, as compared to the year ended June 30,2015,2018, resulting fromthean increase in gross orders of$16.1$37.4 million,plus an increase of $25.2 million because of favorable currency impacts partiallyoffset byan increase innet age-outs of $27.0 million, and cancellations of$2.2 million and an increase in$2.4 million.The net age-outs
of $3.8 million.•The age-outs of $54.7 millionfor the year ended June 30,2016 include $12.12019 were $95.5 million. There were $12.0 millionofage-ins, which represent orders that previously aged-out but have been taken to revenue in the current period. Age-ins offset the gross amount of age-outs in a particular period.
There were
$4.0$25.0 millionof age-ins includedand $22.6 million inage-outs of $50.9 million forcancellations in the year ended June 30,2015.•Cancellations were $13.8 million2019 and$11.6 million in the years endedJune 30,2016 and 2015,2018, respectively. Cancellations are outside of our control and are difficult to forecast; however, we continue to work closely with our customers to minimize the impact of cancellations on our business.•Currency
Other adjustments and foreign currency impacts
resulted in an increase indecreased net ordersof $8.9by $3.6 million anda decrease of $16.3by $4.3 millioninfor the year ended June 30,20162019 and2015,June 30, 2018, respectively.In fiscal 2016, order backlog increased because of a strengthening of foreign currencies, mainly the Japanese Yen against the U.S. Dollar. Conversely, when the U.S. Dollar strengthens, such as it did in fiscal 2015, having contracts based in several currencies such as Euro and Japanese Yen resulted in a negative impact on net orders.65
Net orders decreased by
$32.0$17.0 million for the year ended June 30,2015,2018, as compared to the year ended June 30,2014,2017, resulting fromthe decreasean increase in net age-outs of$16.3$10.8 million,due to foreign currency impacts and a decrease of $12.6 million due to age-outs andan increase in cancellations of$7.5$8.8 million,partiallyand foreign currency and other adjustments of $3.9 million, offset by an increase in gross orders of$4.5$6.5 million.•The net age-outs
of $50.9 millionfor the year ended June 30,2015 include $4.02018 were $68.5 million. There were $9.1 millionofage-ins, which represent orders that previously aged-out but have been taken to revenue in the current period. Age-ins offset the gross amount of age-outs in a particular period.There were
no age-ins included in the age-out number for the year ended June 30, 2014.•Cancellations were $11.6$22.6 million and$4.1$13.8 million in cancellations in the years ended June 30,20152018 and2014,June 30, 2017, respectively. Cancellations are outside of our control and are difficult to forecast; however, we continue to work closely with our customers to minimize the impact of cancellations on our business.•Currency impacts resulted in a decrease in net orders of $16.3 million in the year ended June 30, 2015 compared to an increase of $0.1 million in the year ended June 30, 2014. This significant reduction is the result of having contracts based in several currencies such as Euro, Swiss Franc,Other adjustments and
Japanese Yen. When the U.S. Dollar strengthens, such as it did in fiscal year 2015, the result is a negative impact on our backlog. Conversely, order backlog was increased due toforeign currency impacts decreased net orders by$0.1$4.3 millionin the year ended June 30, 2014 due to minor currency fluctuations.Currently, we expect age-outs in the first quarter of fiscal 2017 to be consistent with the age-outs experienced in the fourth fiscal quarter of 2016. Beginning in fiscal 2013, we made changes to our order taking process, including increased oversight responsibility forandmanagement of distributors and changes in timing as to when we enter some of our distributor orders into backlog. We believe these changes will improve the quality of backlog over time and reduce the level of age-outs.Results of OperationsFiscal 2016 results compared to 2015 (in thousands, except percentages)Years ended June 30, 2016 2015 2016 - 2015
% changeAmount %(a) Amount %(a) Products
$ 193,299 48 % $ 178,710 47 % 8 % Services
205,501 52 201,091 53 2 Net revenue
$ 398,800 100 % $ 379,801 100 % 5 % Gross profit
$ 158,713 40 % $ 145,402 38 % 9 % Products gross profit
84,628 44 74,161 41 14 Services gross profit
74,085 36 71,241 35 4 Research and development expenses
56,652 14 55,752 15 2 Selling and marketing expenses
56,812 14 62,440 16 (9 ) General and administrative expenses
50,122 13 46,379 12 8 Other expense, net
18,295 5 18,621 5 (2 ) Provision for income taxes
2,336 1 2,419 1 (3 ) Net loss attributable to stockholders
$ (25,504 ) 6 % $ (40,209 ) 11 % (37 )% (a)Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.
Net revenueProduct net revenue increasedby$14.6$0.4 million for the year ended June 30,20162018 and June 30, 2017, respectively.In recent years, the percentage of gross orders received from our distribution partners in the international markets represented 83%, 70%, and75% of gross orders for fiscal year ended June 30, 2019, 2018 and 2017, respectively. We anticipate that distributor orders from international markets will continue to represent a significant portion of our gross orders in the foreseeable future. International orders are affected by foreign currency fluctuation as well as government programs that stimulate the purchase of healthcare products, both of which could affect the demand for our products and timing of orders from period to period. In addition, our order-to-revenue conversion cycle for international distributor orders has been generally longer compared to that of direct channel sales and could cause fluctuations in our age-outs from period to period.
Results of Operations
Fiscal 2019 results compared to 2018 (in thousands, except percentages)
Years Ended June 30,
2019
2018
change
(Dollars in thousands)
Amount
%(*)
Amount
%(*)
$
%
Products
$
196,665
47
%
$
183,898
45
%
$
12,767
7
%
Services
222,120
53
%
220,999
55
%
1,121
1
%
Net revenue
$
418,785
100
%
$
404,897
100
%
$
13,888
3
%
Gross profit
$
162,651
39
%
$
161,695
40
%
$
956
1
%
Products gross profit
79,954
41
%
80,860
44
%
(906
)
(1
)%
Services gross profit
82,697
37
%
80,835
37
%
1,862
2
%
Research and development expenses
56,493
13
%
57,251
14
%
(758
)
(1
)%
Selling and marketing expenses
55,998
13
%
60,105
15
%
(4,107
)
(7
)%
General and administrative expenses
49,577
12
%
48,136
12
%
1,441
3
%
Other expense, net
14,927
4
%
19,224
5
%
(4,297
)
(22
)%
Provision for income taxes
2,086
0
%
878
1
%
1,208
138
%
Net loss
$
(16,430
)
(4
)%
$
(23,899
)
(6
)%
7,469
(31
)%
(*)
Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.
66
Product Net Revenue
Product net revenue increased by $12.8 million, or 7%, as compared to the year ended June 30,
2015. Product net revenue increased primarily2018. The increase was due toaan increase of $34.0 million from highernumberunit volume sales ofunits sold and product mix, partially offset by $1.4 million of foreign currency impacts due to the strengthening of the U.S Dollar mainly relative to the Euro. The number of units sold in fiscal 2016 increased by 13%TomoTherapy Systems as compared tofiscal 2015 for boththeCyberKnife Systems and TomoTherapy Systems, theprior year. The increase innet revenue was mainly driven by the increase of CyberKnife Systems recognized into revenue as these systems generally have a higher average selling price. This increaseTomoTherapy System sales was partially offset byproduct revenue upgradesa decrease in CyberKnife System sales of $19.5 million and a decrease in upgrade and otherwhich decreased by $3.7 million in fiscal 2016. There were increases in upgrades related to CyberKnife Systems for the InCise MLC option; whereas, there was a decline in upgraderevenuerelated to TomoTherapy System due to the timingofcustomer upgrade cycles.$1.7 million.ServicesService Net RevenueService net revenue increased by
$4.4$1.1 million,for the year ended June 30, 2016or 1%, as compared to the year ended June 30,2015. Additionally, the2018. The increase wasattributable to anprimarily driven by a $3.1 million increasein trainingof service contract revenuebecause of the expiration and utilization of offered training; however, we do not expect training revenue from expired contracts to be at this volume going forward. There were also increases in installation revenue because of the increase in the units sold in fiscal 2016 as compared to prior year. This was partiallyoffset by$3.4a decrease of $2.0 millionof foreign currency impacts due to the strengthening of the U.S. Dollar mainly relative to the Euro.Table of Contentsin upgrade, installation, and spare parts revenue.Net revenue by geographic region, based on the shipping location of our customer, is as follows (in thousands, except percentages):
Years Ended June 30, Years Ended June 30,
2016 2015 2019
2018
Net revenue
$ 398,800 $ 379,801 $
418,785
$
404,897
Americas
40 % 46 % 32
%
36
%
Europe, Middle East, India and Africa
35 % 29 % 36
%
30
%
Asia-Pacific (excluding Japan and India)
16 % 15 % Asia Pacific (excluding Japan and India)
15
%
18
%
Japan
9 % 10 % 17
%
16
%
Gross profit
The overall gross profit margin for the year ended June 30,
20162019 was40%39% as compared to38%the gross profit of 40% for the year ended June 30,2015, representing an increase of 2%2018, primarily dueprimarilytoincreaseda decrease in productsales volume and headcount related cost savings compared to the prior year.gross profit. Product gross margin was 41% for the year ended June 30, 2019 as compared to 44% for the year ended June 30,2016 as compared2018, primarily due to42%increased sales of Radixact Systems, which have a lower profit margin than CyberKnife Systems.Research and development expenses
Research and development expenses decreased $0.8 million, or 1%, for the year ended June 30,
2015, representing an increase of 2% because of2019 as compared to theincreased sales volume as well as some favorability in the costs of salesyear ended June 30, 2018. The decrease was primarily due tooverhead absorptiona decrease of $2.6 million in compensation and benefits expenses due to lower headcount and a decrease in travel expenses of $0.3 million, partially offset by a $2.2 million expense related to a project that was terminated.We anticipate research and development expenses in fiscal
2016 being2020 will be slightly lower in absolute dollars thanin the prior year. Service gross marginfiscal 2019 based on our current development roadmap.Selling and marketing expenses
Selling and marketing expenses decreased $4.1 million, or 7%, for the year ended June 30,
2016 was 36%2019 as compared to35% forthe year ended June 30,2015, representing a slight increase of 1%2018. The decrease was mainly duemainlytocontinued revenue growth from the increase in installed base and increased training revenue recognized.Research and development expensesResearch and development expenses were $56.7 million for the year ended June 30, 2016 as compared to $55.8 million for the year ended June 30, 2015, which represents an increase of $0.9 million, or 2%. The increase was primarily due to higher consulting fees associated with quality and validation testing for new products and an on-going development project that resulted in an increase of $3.9 million compared to prior year. The increase in consulting expenses was partially offset by decreased compensation expenses of $2.3 million driven by $1.2 million in lower headcount related to terminations that were completed in the fourth quarter of the prior fiscal year as well as a $1.1 million reduction in incentive-based and stock-based compensation expenses.We anticipate that research and development expenses in fiscal 2017 will be down slightly compared with fiscal 2016 based on fewer consulting expenses to assist with the current schedule of our development projects.Selling and marketing expensesSelling and marketing expenses for the year ended June 30, 2016 were $56.8 million as compared to $62.4 million for the year ended June 30, 2015, which representsa decrease of$5.6$3.0 millionor 9%. The decrease was partially attributable to a $4.4 million decreasein compensationand compensation-related expenses, which consisted mainly of lower commissionexpenseof $3.0 million because of fewer sales in fiscal 2016 with high commission rates and a $1.5 million decrease in salaries and benefits expenses because of decreaseddue to reduced headcount and a$0.3 million decreasereduction inshare-based compensation expense mainly as a resulttravel costs offewer grants of equity awards. These decreases were partially offset by an increase of $0.5 million in severance-related expenses in the fourth quarter of fiscal year 2016.$0.9 million.We anticipate selling and marketing expenses in fiscal
20172020 will be slightlyuphigher in absolute dollars comparedwithto fiscal20162019 due to higher expenses related to new product launches and incremental headcount.67
General and administrative expenses
General and administrative expenses increased $1.4 million, or 3%, for the year ended June 30,
2016 were $50.1 million2019 as compared to$46.4 million forthe year ended June 30,2015, which represents2018. The increase was due to an increase of$3.7$3.6 millionor 8%. This increase was primarily related to higher legal expensesin bad debt expense, offset by a decrease of$3.0$2.2 million in compensation expense due toongoing defense of and response to legal matters, primarily related to the Cowealth Medical matter described in Note 7 to the financial statements. In addition, there was an increase of $0.4 million in severance-related expenses in the fourth quarter of fiscal year 2016.lower headcount.We anticipate general and administrative expenses in fiscal
20172020 will beslightly down compared withlower in absolute dollars than fiscal20162019 due todecreased legal fees.the reduction in bad debt expense.Other expense, net
Other expense, net decreased $4.3 million, or 22%, for the year ended June 30,
2016 was $18.3 million2019 as compared to$18.6 million forthe year ended June 30,2015, which represents a decrease of $0.3 million. This2018. The decrease was primarilyattributabledue toan increasea $3.5 million decrease inother incomeloss on extinguishment of$1.2 million because of a new licensing agreement in the third quarter of fiscal 2016. Foreign currency losses decreased by $0.5 million, from $2.5 milliondebt that occurred in fiscal2015 to $2.0 million in fiscal 2016, primarily because2018 as a result of thestrengtheningretirement ofthe U.S. Dollar against the Euro and the appreciation of the Japanese Yen against the U.S. Dollar. In addition, there was an increase in interest income of $0.3 million as compared to the prior year because of changes in the investment portfolio comprising of higher yield securities. The increases in the interest and other income and reduction in foreign exchange losses were partially offset by higher interest expenses of $0.9 million, primarily the result of higher accretion of debt discount and amortization of debt offering costs as compared to fiscal 2015 on the 3.75% Convertible Notes, theour 3.50% Convertible Notestheand 3.50% Series A Convertible Notes, a $0.4 million increase in interest income, andthe Secured Term Loan. Additionally, $1.0a $0.3 millionof non-cash debt extinguishment loss was incurreddecrease infiscal 2016 because of the extinguishment of $63.4 million of the 3.75% Convertible Notes.foreign exchange losses.Provision for income taxes
The provision for income taxes was
lowerhigher in fiscal20162019 as compared to fiscal2015 mainly2018 due tothe activities in international locations—reduction ofhigher foreign earnings. In both fiscal 2019 and 2018, we released tax benefits related touncertainfinal taxpositions andassessments from the Swiss tax authorities for the period from fiscal 2011 through fiscal 2017, which decreased our foreignearnings.taxes.At June 30,
2016,2019, we had federal and state net operating loss carryforwards of$325.3$330.9 million and$145.6$131.6 million, respectively. These federal and state net operating loss carryforwards are available to offset future taxable income, if any, in varying amounts and will begin to expire in20192025 for federal and20172020 for statepurposes, respectively. Such net operating loss carryforwards include tax benefits from employee stock option exercises in excess of the share-based compensation expense that has been recognized for these awards. We will record approximately $3.8 million as a credit to additional paid-in capital if and when such excess benefits are ultimately realized.purposes. We also had federal and state research and development tax credit carryforwards of approximately$17.9$20.6 million and$17.6$20.1 million, respectively. If not utilized, the federal research credits will begin to expire in2019,2020, the California research credits have no expiration date and the other state research credits will begin to expire in2017.2020. Realization of the deferred tax assets, among other factors, is dependent on our ability to generate sufficient taxable income prior to the expiration of the carryforwards. Because of the inconsistent history of net operating income as adjusted for permanent differences, we cannot conclude that the net domestic deferred tax assets will more likely than not be realized. Accordingly, we have recorded a full valuation allowance against our domestic net deferred tax assets.At June 30, 2016, thereIn December 2017, the Tax Cuts and Jobs Act of 2017 (Tax Act) wasno provisionsigned into law, which significantly amends the Internal Revenue Code of 1986, among other things reduces the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, imposes a one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, limits the tax deduction forU.S. incomeinterest expense to 30% of adjusted tax earnings, eliminates net operating loss carrybacks, and allows forundistributed earnings of our foreign subsidiaries as it is currently our intentionfederal net operating losses (“NOL”) toreinvest these earningsbe carried over indefinitelyin operations outsidefor NOL generated after December 31, 2017.As permitted by the U.S.
The cumulative amount of such undistributed earnings upon which no U.S. income taxhas been providedSecurities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118"), we have completed the accounting analysis based on the guidance, interpretations, and data available as of June 30,2016 was $22.4 million. If repatriated, these earnings could result in a2019. We finalized the assessment of the transitional impacts of the Tax Act, which did not impact our tax expenseatfor thecurrentfiscal year ended June 30, 2019. Any future legislative changes, as well as any other new or proposed Treasury regulations, which have yet to be issued, will continue to be assessed and evaluated.The Tax Act has a requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC’s U.S.
Federal statutoryshareholder. The income required to be included in gross income is referred to as global intangible low taxrateincome (“GILTI”) and is defined under Internal Revenue Code (“IRC”) Section 951A as the excess of35%, subject to availablethe shareholder’s net CFC tested income over the net deemed tangible income return. The GILTI inclusion amount has been absorbed by net operatinglosseslosses. We made a policy decision to record GILTI tax as a current-period expense when incurred.The Tax Act also enacted the Base Erosion and
other factors. SubjectAnti-Abuse Tax (“BEAT”). The BEAT minimum tax under IRC Section 59A is applicable tolimitation,the extent that the BEAT taxon undistributed earnings may also be reduced by foreignamount is greater than the regular corporate taxcredits that may be generated in connectionfor a given year. This tax is applicable to companies withthe repatriation of earnings.prior 3-year average annual gross receipts exceeding $500 million. We currently do not meet this threshold since our current average annual gross receipts is less than $500 million.68
Fiscal
20152018 results compared to20142017 (in thousands, except percentages)Years ended June 30, 2015 2014 2015 - 2014
% changeAmount %(a) Amount %(a) Products
$ 178,710 47 % $ 173,607 47 % 3 % Services
201,091 53 195,812 53 3 Net revenue
$ 379,801 100 % $ 369,419 100 % 3 % Gross profit
$ 145,402 38 % $ 142,800 39 % 2 % Products gross profit
74,161 41 76,015 44 (2 ) Services gross profit
71,241 35 66,785 34 7 Research and development expenses
55,752 15 53,724 15 4 Selling and marketing expenses
62,440 16 61,885 17 1 General and administrative expenses
46,379 12 45,335 12 2 Other expense, net
18,621 5 14,216 4 31 Provision for income taxes
2,419 1 3,088 1 (22 ) Net loss attributable to stockholders
$ (40,209 ) 11 % $ (35,448 ) 10 % 13 % (a)Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.
Net revenueYears Ended June 30,
2018
2017
2018-2017
Amount
%(*)
Amount
%(*)
% change
Products
$
183,898
45
%
$
179,611
47
%
2
%
Services
220,999
55
%
203,803
53
%
8
%
Net revenue
$
404,897
100
%
$
383,414
100
%
6
%
Gross profit
$
161,695
40
%
$
141,341
37
%
14
%
Products gross profit
80,860
44
%
66,254
37
%
22
%
Services gross profit
80,835
37
%
75,087
37
%
8
%
Research and development expenses
57,251
14
%
49,921
13
%
15
%
Selling and marketing expenses
60,105
15
%
57,477
15
%
5
%
General and administrative expenses
48,136
12
%
43,766
11
%
10
%
Other expense, net
19,224
5
%
18,718
5
%
3
%
Provision for income taxes
878
1
%
1,038
1
%
(15
)%
Net loss
$
(23,899
)
(6
)%
$
(29,579
)
(8
)%
(19
)%
(*)
Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.
Net revenue
Product Net Revenue
Product net revenue increased by
$5.1$4.3 million,for the year ended June 30, 2015or 2%, as compared to the year ended June 30,2014. Product net revenue increased primarily2017. The increase was due toaan increase of $14.5 million from highernumber of units soldunit volume andproduct mix, partially offset by $7.5 million of foreign currency impacts due to the strengtheninghigher average pricing per system of theU.S Dollar. The number of units sold in fiscal 2015 increased by 4%CyberKnife Systems as compared tofiscal 2014 driven by anthe prior year. The increase inthe number ofsystem sales for CyberKnifeSystems recognized into revenue, whichwas partially offset by a decrease inthe numberTomoTherapy System sales ofTomoTherapy Systems recognized into revenue; however, as the CyberKnife Systems generally have$8.5 million and ahigher average selling price, the overall net productdecrease in upgrade and other revenueincreased. In addition, product revenue upgrades increased by $3.0 million in fiscal 2015.of $1.9 million.Service Net Revenue
Services net revenue increased by
$5.3$17.2 million,for the year ended June 30, 2015or 8%, as compared to the year ended June 30,2014.2017. The increaseof $5.3was mainly driven by a $10.4 millionwasand $4.9 million attributable toa netincreases in our system installed base revenue and upgrade revenue, respectively, together with an increase inour installed base and customer conversion to higher priced maintenance contracts (particularly the TomoTherapy Systems). This was partiallyspare parts sales of $2.1 million. These increases were offset by$6.7 million of foreign currency impacts due to the strengthening of the U.S. Dollar.Table of Contentsan immaterial decrease in training revenue.Net revenue by geographic region, based on the shipping location of our customer, is as follows (in thousands, except percentages):
Years Ended June 30, Years Ended June 30,
2015 2014 2018
2017
Net revenue
$ 379,801 $ 369,412 $
404,897
$
383,414
Americas
46 % 42 % 36
%
40
%
Europe, Middle East, India and Africa
29 % 31 % 30
%
27
%
Asia-Pacific (excluding Japan and India)
15 % 12 % Asia Pacific (excluding Japan and India)
18
%
15
%
Japan
10 % 15 % 16
%
18
%
69
The overall gross profit margin for the year ended June 30,
20152018 was38%40% as compared to39%the gross profit of 37% for the year ended June 30,2014, representing a slight decrease of 1%2017, primarilyattributabledue toforeign currency impacts resulting from the strengthening of the U.S. Dollar.an increase in system sales profit. Product gross margin was42% for the year ended June 30, 2015 as compared to44% for the year ended June 30,2014, representing a slight decrease of 2% also because of foreign currency impacts resulting from the strengthening of the U.S. Dollar. Services gross margin2018 as compared to 37% for the year ended June 30,20152017, primarily due to higher unit volume, higher average selling price of our latest generation platforms and product mix together with an $8.0 million decrease of intangible amortization related to the acquisition of TomoTherapy Incorporated, which was35%fully amortized in the fourth quarter of fiscal 2017. Service gross margin remained flat as compared to34%prior year.Research and development expenses
Research and development expenses increased $7.3 million, or 15%, for the year ended June 30,
2014, representing a slight2018 as compared to the year ended June 30, 2017. The increase was primarily due to $6.0 million of1%higher compensation and benefits expenses duemainlytocontinued revenue growth from thean increase ininstalled baseheadcount, $1.1 million of higher project related spending, andcontract mix accompanied by lower service part costs asaresult of the continued$0.2 million increase inreliability of the TomoTherapy Systems, all of which offset the foreign currency impacts resulting from the strengthening of the U.S. Dollar.travel expense.ResearchSelling anddevelopmentmarketing expensesResearchSelling and
developmentmarketing expenseswere $55.8increased $2.6 million, or 5%, for the year ended June 30,20152018 as compared to$53.7the year ended June 30, 2017. The increase was mainly due to an increase of $2.2 million in compensation expense due to increased headcount and higher commissions related to increased revenue and a $0.4 million increase in travel and marketing related expenses.General and administrative expenses
General and administrative expenses increased $4.4 million, or 10%, for the year ended June 30,
2014, which represents an increase of $2.1 million, or 4%. The increase was primarily the result of higher consulting fees associated with a development project that started in fiscal 2015 and resulted in an increase of $1.2 million compared to the prior year. In addition, there was an increase of $1.2 million due to additional allocation and facilities expenses compared to the prior year and an increase of $0.3 million in travel expenses2018 as compared tothe prior year because of increased international travel. These increases were partially offset by decreased compensation expenses of $1.4 million driven by a $2.0 million reduction in incentive-based compensation accrual expenses and a decrease of $0.7 million in contractor expenses, partially offset by higher salaries of $0.8 million, an increase in recruiting and relocation fees of $0.1 million and increased stock-based compensation expenses of $0.5 million because of a higher number of equity grants. There were also increases as a result of $0.4 million in severance recorded inthe year ended June 30,2015, related2017. The increase was due toterminations associated with departmental realignment.$2.3 million of higher compensation due to an increase in headcount, $1.9 million of higher consulting fees and strategic business development projects, and a $0.2 million increase in technology expenses.Selling and marketing expensesOther expense, netSelling and marketing expensesOther expense, net increased $0.5 million, or 3%, for the year ended June 30,
2015 were $62.4 million2018 as compared to$61.9 million forthe year ended June 30,2014, which represents an increase of $0.5 million, or 1%.2017. The increase waspartially attributableprimarily due to a$2.8net $2.5 million increase incompensationloss on extinguishment of debt that occurred in the first andcompensation-related expenses, which consisted mainlythird quarters ofan increasefiscal 2018, a $0.4 million decrease incommission expense of $2.2 million because of higher sales,interest income, and a$1.9$0.2 million increase insalaries and benefits expenses becauseloss on sale ofincreases in personnel, and a $0.8 millionour investments. The increasein share-based compensation expense mainly attributable to an increase in grants of equity awards. These increases were partiallywas mostly offset by adecrease$2.3 million reduction in debt interest expense due to retirement of$1.2 million in incentive-based compensation accrual expenses and $0.9 million in decreased other compensation mainly related to lower severance expensescertain of our convertible notes in fiscal2015 than those related to terminations in fiscal 2014. Consulting expenses also decreased $1.5 million because of significant marketing initiatives infiscal 2014 with no similar projects in fiscal 2015. There were also decreases of $0.4 million in allocation expenses and $0.3 million in reduced sponsorships compared to the prior year.General and administrative expensesGeneral and administrative expenses for the year ended June 30, 2015 were $46.4 million as compared to $45.3 million for the year ended June 30, 2014, which represents an increase of $1.1 million, or 2%. This increase was primarily related to higher legal expenses of $3.5 million because of ongoing defense of and response to legal matters, primarily related to the Cowealth Medical matter described in Note 7 to the financial statements. In addition, there was increased stock-based compensation expense of $1.3 million due to increased equity grants. These increases were partially offset by reductions in incentive-based compensation accrual expenses of $2.0 million as compared to the prior year2018 and a$1.0$0.3 million decrease inrestructuring costs as compared to the prior year. Additionally, consulting fees decreased $0.7 million because of fewer projects in fiscal 2015 as compared to fiscal 2014.foreign exchange losses.Other expense, netOther expense, net for the year ended June 30, 2015 was $18.6 million as compared to $14.2 million for the year ended June 30, 2014, which represents an increase of $4.4 million. This increase was primarily attributable to increased foreign currency losses of $2.5 million primarily because of a stronger U.S. Dollar in comparison to the Euro, Japanese Yen and the Swiss Franc. Additionally, non cash interest expense increased by $2.2 million in 2015 as a result of the refinancing of our 3.50% Convertible Notes into 3.50% Series A Convertible Notes in the fourth quarter of fiscal 2014.Provision for income taxes
The provision for income taxes was lower in fiscal
20152018 as compared to fiscal2014 mainly as a result of the activities in international locations—reduction of2017 due to lower foreign earnings. In both fiscal 2018 and 2017, we had tax benefits related touncertainfinal taxpositions andassessments from the Swiss tax authorities for the period from fiscal 2011 through fiscal 2016, which decreased our foreignearnings.taxes.At June 30,
2015,2018, we had federal and state net operating loss carryforwards of$329.6$329.7 million and$157.5$146.8 million, respectively. These federal and state net operating loss carryforwards are available to offset future taxable income, if any, in varying amounts and will begin to expire in2019 for federal and 2016 for state purposes, respectively. Such net operating loss carryforwards include tax benefits from employee stock option exercises in excess of the share-based compensation expense that has been recognized for these awards. We will record approximately $3.9 million as a credit to additional paid-in capital if and when such excess benefits are ultimately realized.2019. We also had federal and state research and development tax credit carryforwardsat June 30, 2015,of approximately$16.3$18.9 million and$16.5$19.2 million, respectively. If not utilized, the federal research credits will begin to expire in2019. The2019, the California research credits have no expiration date and the other state research creditsbeginbegan to expire in2016.2014. Realization of the deferred tax assets, among other factors, is dependent on our ability to generate sufficient taxable income prior to the expiration of the carryforwards. Because of the inconsistent history of net operating income as adjusted for permanent differences, we cannot conclude that the net domestic deferred tax assets will more likely than not be realized. Accordingly, we have recorded a full valuation allowance against our domestic net deferred tax assets.At June 30, 2015, there was no provision for U.S. income tax for undistributed earnings of our foreign subsidiaries as it is currently our intention to reinvest these earnings indefinitely in operations outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income tax has been provided as of June 30, 2015, was $20.3 million. If repatriated, these earnings could result in a tax expense at the current U.S. Federal statutory tax rate of 35%, subject to available net operating losses and other factors. Subject to certain limitations, tax on undistributed earnings may also be reduced by foreign tax credits that may be generated in connection with the repatriation of earnings.70Share-basedShare-Based Compensation ExpenseIn fiscal
2016, 20152019, 2018 and2014,2017, we recordedshare-basedshare‑based compensation expense of$12.6$10.6 million,$13.9$12.3 million and$11.3$13.6 million, respectively, related to awards under our stock incentivestock plans and restricted stock awards, or RSAs, assumed in connection with the acquisition of TomoTherapy. Share-basedplans. Share‑based compensation expense was recorded net of estimated forfeitures. As of June 30,2016,2019, we had approximately$21.2$18.9 million of unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options, shares under our Employee Stock Purchase Plan, or ESPP,shares,restricted stock units, or RSUs, and market stock units, or MSUs, which we expect to recognize over a weighted average period from0.60.8 to2.33.25 years.Liquidity and Capital Resources
At June 30,
2016,2019, we had$119.8$76.8 million in cash and cashequivalents and $47.2 million in investments.equivalents. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks included in Part I, Item 1A titled"Risk“Risk Factors."” Also refer to Note12, "Debt"10, Debt to the consolidated financial statements for discussion of the Revolving Credit Facility, our 3.75% ConvertibleNotes.Notes and Term Loan outstanding as of June 30, 2019. Based on our cash and cash equivalents balance, available debt facilities, current business plan and revenue prospects, we believe that we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months.In addition, the undistributed earnings of our foreign subsidiaries at June 30,
2016,2019, are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise.Accordingly, no provisions for U.S.Future repatriation of the Company’s foreign earnings are subject to incometaxes have been provided thereon.taxes. We anticipate that we have adequate liquidity and capital resources and would not need to repatriate earnings. As of June 30,2016,2019, we had approximately$76.8$50.1 million of cash and cash equivalents at our foreign subsidiaries.In January 2019, Accuray Asia Limited, one of our wholly-owned subsidiaries, entered into a joint venture contract with CNNC High Energy Equipment (Tianjin) Co., Ltd., a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture in China. We do not anticipate the JV will have a material impact on our working capital needs in the next 12 months.
Cash Flows
Years Ended June 30,
2019
2018
2017
Net cash provided by (used in) operating activities
$
(29,641
)
$
18,331
$
(380
)
Net cash provided by (used in) investing activities
(4,311
)
17,766
17,823
Net cash provided by (used in) financing activities
28,473
(27,453
)
(54,538
)
Effect of exchange rate changes on cash, cash
equivalents and restricted cash
124
(346
)
197
Net increase (decrease) in cash, cash equivalents and
restricted cash
$
(5,355
)
$
8,298
$
(36,898
)
Cash Flows From Operating Activities
Net cash used in operating activities was $29.6 million in fiscal 2019, resulting primarily from a net change in operating assets and liabilities of $44.6 million and non‑cash items of $31.5 million that was offset by a net loss of $16.4 million.
Non‑cash items consisted primarily of stock‑based compensation expense of $10.6 million, depreciation and amortization expense of $10.5 million, non‑cash interest expenses on debt of $4.9 million, provision for bad debt of $3.7 million, and write down of inventories of $2.3 million.
Fiscal years ended June 30, (Dollars in thousands) 2016 2015 2014 Net cash provided by (used in) operating activities
$ 33,538 $ (16,733 ) $ 346 Net cash provided by investing activities
8,262 3,689 8,492 Net cash provided by (used in) financing activities
(757 ) 5,895 8,377 Effect of exchange rate changes on cash and cash equivalents
(823 ) (5,646 ) 1,818 Net increase (decrease) in cash and cash equivalents
$ 40,220 $ (12,795 ) $ 19,033 The net change in operating assets and liabilities was primarily due to a $46.2 million increase in accounts receivable due to the payment terms and timing of revenue transactions and cash collection, an increase of $14.2 million in inventories to support anticipated product shipments in future periods, an increase of $13.0 million in prepaid and other assets primarily due to incremental costs of obtaining contracts capitalized under ASC 606, and a decrease of $2.5 million in customer advances due to the timing and receipts of new deposits. This was partially offset by an increase of $10.7 million in accrued liabilities and an increase of $9.5 million in accounts payable due to timing of payments.
Operating ActivitiesNet cash provided by operating activities was
$33.5$18.3 million in fiscal2016 as compared to2018, resulting primarily from a netcash usedchange in operatingactivitiesassets and liabilities of$16.7$10.0 millionin fiscal 2015. Netand non‑cashprovideditems of $32.2 million that was offset byoperating activities in fiscal 2016 was primarily related to:•Neta net loss of$25.5$23.9 million.Non‑cash items consisted primarily of stock‑based compensation expense of $12.3 million;
•Net loss offset by non-cash itemsdepreciation and amortization expense of$43.1$9.7 million; non‑cash interest expenses on debt of $5.0 million,related to depreciation of fixed assets, amortization of intangible assets, share-based compensation, amortization and accretion of discount and premium on investments, amortization of debt issuance costs, accretion of interest on long-term debt, loss on disposal of property and equipment,loss on extinguishment of debt of $3.5 million, andprovision for excesswrite down of inventories of $1.6 million.The net change in operating assets and
obsolete inventory;•Decrease in restricted cash of $2.7 millionliabilities was primarily due torelease of restrictions on cash related to bunker constructions during the year;•Decrease in accounts receivable of $23.0 million asaresult of the timing of cash collections from customers in fiscal 2016;•Increase in inventories of $10.5 million due to increase in purchases in fiscal year 2016 to support expected future sales and service needs that will begin to be utilized in fiscal year 2017;•Increase in prepaid expenses and other assets of $6.0 million primarily because of an increase in long-term accounts receivable of $6.0 million attributable to one customer with extended payment terms and several large revenue contracts accounted for as capital leases as compared to the same period in prior year and an increase of $0.6 million of prepaid commission because of higher orders compared to revenue recognized in fiscal year 2016. These increases were partially offset by reduction of other prepayments totaling $0.6 million from the release of vendor advances;•Increase in accounts payable of $2.4 million primarily attributable to an increase in inventory purchasing activities and the timing of payments as there was more large value payment activity at the end of the prior fiscal year as compared with the end of fiscal year 2016;•Decrease in accrued liabilities of $1.9 million primarily related to the bonus accrual reduction of $3.0 million because of lower bonus rate in fiscal year 2016 compared to fiscal year 2015. Accrued payroll taxes decreased $1.6 million because of the timing of the year-end payroll cut-off as well as $0.6$7.2 million decrease incommissions payable because of lower commission rates. These decreases were partially offset by an increase of $1.9 million income tax payableaccounts receivable due to the timing offilingrevenue transactions andpayments for fiscal 2015 andcash collection, a $6.2 million increaseof $1.4 million in other accrued liabilities for research and development collaborations;•Increasein customer advancesof $2.6 million because of the payments received for the future revenue deliverables; and•Increase in deferred revenue of $2.4 million because ofdue to the timingof customer billingandrevenue recognition,new deposit receipts, and a $4.2 million decrease in prepaid and other assets. This was partially offset by a $8.7 million increase in inventory to support anticipated product shipments in future periods and a net $2.5 million decrease in deferredcost of $1.5 million attributable to the timing of inventory transfer.
Net cash used in operating activities was
$16.7$0.4 million in fiscal2015 as compared to2017 and consisted of a net loss of $29.6 million, non‑cashprovided byitems of $41.7 million, and a net change in operatingactivitiesassets and liabilities of$0.3$12.5 million. Non‑cash items consisted primarily of depreciation and amortization expense of $18.0 million, stock��based compensation expense of $13.6 million; non‑cash interest expenses on debt of $7.8 million and write down of inventories of $2.3 million. The significant items infiscal 2014. Netthe change in operating assets and liabilities include cash usedin operating activities in fiscal 2015 was primarily related to:•Net loss of $40.2 million;•Net loss offset by non-cash items of $45.4 million related to depreciation of fixed assets, amortization of intangible assets, share-based compensation, amortization and accretion of discount and premium on investments, amortization of debt issuance costs, accretion of interest on long-term debt, loss on disposal of property and equipment, and provision for excess and obsolete inventory;•Increase in restricted cash of $2.4 million because of a contractual guarantee requirement;•Increaseresulting from increases in accounts receivable of $15.7 million and other current and non‑current assets of $4.4 million. These uses of cash were offset in part by an increase in accounts payable of $2.2 million and accrued liabilities of $8.3 million, which was offset by a decrease in deferred revenue of $8.7 million and customer advances of $5.2 million as well as aresult of increased sales of $10.4 million offset by cash collections from customers in fiscal 2015;•Increasedecrease in inventories of$21.1 million because of$7.7 million. The increase inpurchases to support future sales and service needs;•Decrease in prepaid expenses and other assets of $2.3 million primarily to the result of the reduction of prepaid taxes of $1.7 million primarily in foreign locations due to settlements,accounts receivable was areduction in debt related costs of $1.5 million due to continued amortization, and a decrease in prepaid commissions of $1.0 million attributable to the conversion of deferred revenue into
•Decrease in accounts payable of $1.8 million because of lower billings as a result of timing;•Decrease in accrued liabilities of $8.6 million primarily related to the bonus accrual reduction of $8.4 million due to bonus payments relating to fiscal 2014 made in the first fiscal quarter of 2015 offset by additional accrual for bonuses for the current fiscal year. Accrued payroll decreased $2.1 million because of the timing of the year-end payroll cut-off and sales tax payable decreased in the U.S. by $0.5 million attributable to process improvements in timely payments. Income tax payable also decreased by $1.5 because of the timing of filing and payments for fiscal 2014. These decreases were partially offset by an increase of $3.5 million in deferred rent as a result of a renegotiated lease agreement;•Increase in customer advances of $0.6 million because of the payments received for the future revenue deliverables; and•Increase in deferred revenue of $9.7 million because of the timing of customer billing and revenue recognition, and decrease in deferred cost of $7.8 million attributable to the timing of inventory transfer.
revenue in fiscal 2015. These decreases were partially offset by increases in the prepaid benefits balance of $0.5 million becausefunction of the timing of paymentshigher other prepayments attributable to additional vendor advances of $0.8 million, and an increase in prepaid maintenance of $0.4 million because of several new software agreements;Net cash provided by operating activities was $0.3 million in fiscal 2014. Net cash provided by operating activities in 2014 was primarily related to:•Net loss of $35.4 million;•Net loss offset by non-cash items of $42.9 million related to depreciation of fixed assets, amortization of intangible assets, share-based compensation, amortization and accretion of discount and premium on investments, amortization of debt issuance costs, accretion of interest on long-term debt, recovery of doubtful accounts receivable, loss on disposal of property and equipment, and provision for excess and obsolete inventory;•Increase in accounts receivable of $14.8 million as a result of increased sales of $53.4 million offset by cash collectionsfrom customersin fiscal 2014;•Increase in inventories of $8.3 million because of increase in purchases to support sales;•Increase in prepaid expenses and other assets of $5.2 million primarily because of the increase in prepaid commissions balance of $2.8 million as a result of the increase in orders and prepaid taxes of $2.9 million mostly in foreign locations;•Decrease in accounts payable of $1.1 million because of the timing of payments;•Increase in accrued liabilities of $21.7 million primarily because of the increase in accrued bonus expense of $14.2 million, increase in other accrued compensation related expense of $6.0 million;•Increase in customer advances of $1.7 million due to the payments received for the future revenue deliverables; and•Increase in deferred revenue of $4.0 million because of the timing of customer billing and revenue recognition, and increase deferred cost of $4.9 million attributable to the timing of inventory transfer.
Table of Contentsdriven by longer payment terms offered.Cash Flows From Investing Activities
Net cash used in investing activities was $4.3 million in fiscal 2019, which primarily consisted of purchases of property and equipment.
Net cash provided by investing activities was
$8.3$17.8 million in fiscal2016,2018, which primarily consisted of sales and maturities ofshort-termshort‑term investments of$80.7$30.3 million, offset by purchases of investments of $5.9 million, purchases of property and equipment of$8.1$6.3 million, andpurchasespayment ofinvestmentsintangible assets of$64.3$0.3 million.Net cash provided by investing activities was
$3.7$17.8 million in fiscal2015,2017, which primarily consisted of sales and maturities ofshort-termshort‑term investments of$121.3$38.2 million, offset by purchases of investments of $15.0 million, purchases of property and equipment of$10.4$5.0 million andpurchasespurchase ofinvestmentsintangible assets of$107.2$0.3 million.Net cash provided by investing activities was $8.5 million in fiscal 2014, which primarily consisted of sales and maturities of short-term investments of $64.6 million, offset by purchases of property and equipment of $11.9 million and purchases of investments of $44.2 million.Cash Flows From Financing Activities
Net cash provided by financing activities during fiscal 2019 was $28.5 million, which was primarily due to $20.0 million of net debt proceeds related to a draw under the Term Loan, a net $4.6 million increase in borrowings under our Revolving Credit Facility, and $3.9 million in proceeds from employee stock plans.
Net cash used in financing activities during fiscal
20162018 was$0.8$27.5 million, which was primarily due to $69.8 million paid to repurchase and retire our 3.50% Convertible Notes and 3.50% Series A Convertible Notes and $27.9 million used to pay down the Revolving Credit Facility. These expenses were offset by $66.1 million of net debt proceeds related to the Term Loan and issuance of the 3.75% Convertible Notes and $4.1 million in proceeds from employee stock plans.Net cash used in financing activities during fiscal 2017 was $54.5 million, primarily attributable to
$66.4$105.2 million in payments to convertible note holders and$2.8in connection with our term‑loan with Cerberus Business Finance, LLC, and $1.4 million of taxes paid related to net share settlement of equity awards,partiallyoffset by$64.6$48.3 million proceeds fromdebt proceedsour Revolving Credit Facility and $3.8 million from proceeds from employee stock plans.Net cash provided by financing activities during fiscal 2015 was $5.9 million, attributable to $6.6 million from proceeds from employee stock plans, partially offset by $0.7 million of taxes paid related to net share settlement of equity awards.72Net cash provided by financing activities during fiscal 2014 was $8.4 million, attributable to $9.1 million from proceeds from employee stock plans, partially offset by $0.3 million of taxes paid related to net share settlement of equity awards and $0.4 million in payments to convertible note holders to refinance approximately $70.3 million aggregate principal amount of our 3.50% Convertible Notes.Operating Capital and Capital Expenditure Requirements
Our future capital requirements depend on numerous factors. These factors include but are not limited to the following:
•Revenue generated by sales of our products and service plans;
•Costs associated with our sales and marketing initiatives and manufacturing activities;
•Facilities, equipment and IT systems required to support current and future operations;
•Rate of progress and cost of our research and development activities;
•Costs of obtaining and maintaining FDA and other regulatory clearances of our products;
•Effects of competing technological and market developments;
•Number and timing of acquisitions and other strategic
transactions.transactions; andServicing and maturity of our current future indebtedness.
We believe that our current cash and cash equivalents
and investmentswill be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If these sources of cash and cash equivalentsand investmentsare insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities orobtainenter into additional credit facilities. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable tous. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.
Contractual Obligations and Commitments
The following is a schedule summarizing our obligations to make future payments under contractual obligations as of June 30,
2016:Payments due by period (in thousands) Total Less than
1 year(2)1 - 3 years 3 - 5 years More
than
5 yearsNotes and Secured Loan(1)
$ 219,858 $ 40,108 $ 122,000 $ 57,750 $ — Interest on Notes and Secured Loan
28,496 9,494 12,218 6,784 — Operating leases
39,864 8,812 13,097 7,931 10,024 Total
$ 288,218 $ 58,414 $ 147,315 $ 72,465 $ 10,024 (1)- 2019. Refer to Note 10,
Any conversion, redemption or purchase of our Notes would impact our cash payments notedDebt inthe preceding table. Please see Note 12,Debt,Notes to theconsolidated financial statements for further information. (2)Please see Note 18,Subsequent Event, to the consolidated financial statements regarding the paymentConsolidated Financial Statements in Item 8, Part II, ofthe 3.75% Convertible Notesthis report onAugust 1, 2016.
Payments due by period
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
3.75% Convertible Notes, Term Loan,
and Revolving Credit Facility(1)
$
176,295
$
—
$
21,833
$
154,462
$
—
Interest on 3.75% Convertible Notes, Term Loan,
and Revolving Credit Facility(2)
35,171
9,807
18,739
6,625
—
Operating leases
38,075
8,675
14,511
12,279
2,610
Total
$
249,541
$
18,482
$
55,083
$
173,366
$
2,610
(1)
Any conversion, redemption or purchase of our convertible notes would impact our cash payments noted in this table. Please see Note 10, Debt, to the consolidated financial statements for further information. Amounts presented are for principal only.
(2)
Interest on the Term Loan and Revolving Credit Facility are accrued at 7% and 6% per annum, respectively, which may vary in subsequent periods based upon LIBOR.
73
Our purchase commitments and obligations include all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which we have not received the goods or services and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, and hence, have not been included in the table above.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements for the years ended June 30,
2016, 2015,2019, 2018, or2014.2017.Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.
All of our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note
2,1,Summary ofThe Company and its Significant Accounting Policies, to the consolidated financial statements. The methods, estimates and judgments that we use in applying ouraccounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Management believes the critical accounting policies and estimates are those related to revenue recognition, business combinations and assessment of recoverability of goodwill and intangible assets, valuation of inventories,
share-basedshare‑based compensation expense, convertible notes, income taxes, allowance for doubtful accounts and loss contingencies.C
Revenue Recognitiononcentration of Credit and Other RisksOur cash and cash equivalents are deposited with several major financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. We have not experienced any losses in such accounts and do not believe that we are exposed to any significant risk of loss on these balances.
For the years ended June 30, 2019, 2018, and 2017, there were no customers that represented 10% or more of total net revenue. We had one customer at June 30, 2019 and no customers at June 30, 2018 that accounted for more than 10% of our total accounts receivable, net.
We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts receivable balances are charged against the allowance for doubtful accounts once collection efforts are unsuccessful.
Single-source suppliers presently provide us with several components. In most cases, if a supplier was unable to deliver these components, we believe that we would be able to find other sources for these components subject to any regulatory qualifications, if required.
74
Our revenue is primarily derived from sales of CyberKnife and TomoTherapy Systems and services, which include PCS, installation services, training and other professional services. We record our revenue net of any value added or sales tax. We recognize revenue for certain performance obligations at the point in time when control is transferred, such as delivery of products. We recognize revenue for certain other performance obligations over a period of time as control of the goods or services is transferred, such as PCS and construction contracts. Payments received in advance of system shipment are recorded as customer advances and are deferred until product shipment when they are recognized in revenue. We assess the probability of collection based on a number of factors, including past transaction history with the customer and credit-worthiness of the customer. We generally do not request collateral from our customers.
We frequently enter into sales arrangements
with customersthat contain multiple elements ordeliverables and we have to make a number of reasoned judgments with respect to elements of these sales arrangements, including how to allocate the proceeds received from an arrangement, whether there are multiple elements in the arrangement, whether any undelivered elements are essential to the functionality of the delivered elements and the appropriate timing of revenue recognition with respect to these arrangements.deliverables. For sale arrangements that contain multiple elements, weallocate the arrangement consideration to each element based on the relative selling price method, whereby the relative selling price of each deliverable is determined using vendor specific objective evidence (VSOE), of fair value,account for individual products and services separately ifit exists. VSOE of fair value for each element is based on our standard rates charged for the product or service when sucha product or service issoldseparately identifiable from other items in the bundled package and if a customer can benefit from it on its own orbased uponwith other resources that are readily available to theprice established by the Company's pricing committee when that product or service is not yet being sold separately. When we are not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to us infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, we attempt to determine thecustomer. The stand-alone selling priceof each element based on third-party evidence of selling price (TPE), as(“SSP”) is determined based oncompetitors'observable pricesfor similar deliverables when sold separately. TPE typically is difficult to establish due to the proprietary differences of competitive products and difficulty in obtaining reliable competitive standalone pricing information. When we are not able to establish selling price using VSOE or TPE, we use our best estimate of selling price (BESP), in the allocation of arrangement consideration. The objective of BESP is to determine the priceat which wewould transact a sale ifseparately sell the products and services. If an SSP is not directly observable, then we will estimate the SSP considering market conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.Product Revenue
The majority of product revenue is generated from sales of CyberKnife and TomoTherapy Systems, including Radixact Systems. Revenue is recognized once the performance obligations are satisfied by transferring control of the product
or service were soldto a customer, which is generally upon delivery.We record revenue from sales of systems, product upgrades and accessories to our customers based on
a stand-alone basis. We determine BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographiesthe general terms andgross margin. The determination of BESP is made through annual analysis of our pricing practices and adjusted if necessary.Revenue recognition also depends on all or a combinationconditions of thefollowing: timingexecuted sales and distribution agreements as well as the specific terms and conditions executed for each sale, and once the performance obligations are satisfied by transferring control ofshipment, completionthe product to a customer.We record revenue considering all discounts given to, or expected by, customers. As a result, management may make estimates of potential future product returns or trade ins and other allowances related to product revenue in the current period. In general, we do not allow returns from customers and all discounts and allowances are clearly identified in the terms and conditions of each sale.
Service Revenue
Service revenue is generated primarily from PCS contracts (warranty period services and post warranty services), installation
customer acceptanceservices, training and professional services. Service revenue is recognized either ratably over thereadiness of customers' facilities. If shipments are not made on scheduled timelines, installation schedules are delayed or if the products are not accepted bycontractual period as control and benefit transfer to the customer or when service is performed, depending on specific terms and conditions in agreements with customers.Costs associated with service revenue are expensed when incurred, except when those costs are related to system upgrades purchased within a
timely manner,service contract. In those cases, the costs of such upgrades are recognized at the time the upgrade revenue is recognized.Refer to Note 2. Recent Accounting Pronouncements and Note 3. Revenue to our
reported revenues may differ materially from expectations.consolidated financial statements included in this Annual Report on Form 10-K for further information on our adoption of ASC 606.75
Business Combinations andAssessment of Recoverability of Goodwill and Intangible AssetsOur methodology for allocating the purchase price relating to business combinations is determined through established valuation techniques. The allocation of the purchase price to intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and appropriate discount rate for those cash flows.Goodwill represents the excess of the purchase price over the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill is not amortized, but is evaluated for impairment on an annual basis and when impairment indicators are present. We have one operating segment and one reporting unit. Therefore, our consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on the closing price of our common stock on the trading day closestto the annual review date multiplied by the outstanding shares on that date. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and we must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required.
We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Impairment, if any, is measured as the amount by which the carrying value exceeds the fair value of the impaired asset. We review
indefinite-livedindefinite‑lived intangible assets for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.
Valuation of Inventories
The valuation of inventory requires us to estimate obsolete or excess inventory as well as damaged inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. We regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand to support future sales and service. If our demand forecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could be required to write off inventory beyond the current reserve, which would negatively impact our gross margin.
Share-BasedShare‑Based Compensation ExpenseWe use the
Black-ScholesBlack‑Scholes option valuation model to estimate the fair value of stock options and ESPP shares. This valuation model requires the input of highly subjective assumptions, the most significant of which is our estimates of expected volatility and the expected term of the award. Our expected volatility is derived from the historical volatilities of our common stock.Prior to the second quarter of fiscal 2013, our expected volatility was based on the historical volatilities of several unrelated public companies within industries related to our business.We estimate the expected term of stock option by taking the average of the vesting term and the contractual term of the option, as illustrated by the simplified method. We use theMonte-CarloMonte‑Carlo simulation model to estimate the fair value of Market Stock Units (MSUs). The assumptions used in calculating the fair value ofshare-basedshare‑based payment awards representmanagement'smanagement’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, ourshare-basedshare‑based compensation expense could be materially different in the future.We recognize compensation cost for only those shares expected to vest over the requisite service period of the award. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on recent forfeiture activity and expected future employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported
share-basedshare‑based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed.76
Table of ContentsConvertible NotesConvertible NotesWe account for convertible notes in accordance with
ASC 470-20Debt with Conversion and Other Options. ASC 470-20 clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement at our election. ASC 470-20applicable guidance which specifies that an issuer of such instruments should separately account for the liability and equity component of the conversion option. The amount recorded as debt is based on the fair value of the debt component as a standalone instrument, determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance. The difference between the debt recorded at inception and its principal amount is accreted to principal during the estimated life of the note. ASC 470-50, provides guidance on modifications to or exchanges of line-of-credit or revolving arrangements which should be evaluated based on borrowing.Income Taxes
We determine our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which is generally in the fourth quarter of the subsequent year for U.S. federal and state provisions. We have placed a full valuation allowance on all net U.S. deferred tax assets because realization of these tax benefits through future taxable income cannot be reasonably assured. We intend to maintain the valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all of the valuation allowance would be based on our estimate of future profitability. If our estimate were to be wrong, we could be required to charge potentially significant amounts to income tax expense to establish a new valuation allowance.
Our effective tax rate
includesdoes not include the impact ofcertainundistributed foreign earnings for which we have not providedU.S.income taxes because we plan to reinvest such earnings indefinitely outside the United States. Weplanhave estimated whether there is a need for foreign earnings remittance amounts based on projected cash flow needs as well as the working capital andlong-termlong‑term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital andlong-termlong‑term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. We are subject to income taxes in the United States and certain foreign countries, and we are subject to corporate income tax audits in some of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates. We evaluate our uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes. We believe that our reserve for uncertain tax positions is adequate. We review our reserves quarterly, and we may adjust such reserves because of proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, or the expiration of statutes of limitations.Allowance for Doubtful Accounts
We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If our evaluation of our
customers'customers’ financial conditions does not reflect our future ability to collect outstanding receivables, additional provisions may be needed and our operating results could be negatively affected.Loss Contingencies
As discussed in Note
7,9. Commitments and Contingencies, to the consolidated financial statements, we are involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. We provide disclosure if it is reasonably possible that a loss has been incurred and a range of loss or possible loss can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, we could incur significant charges related to legal matters which could have a material impact on our results of operations, financial position and cash flows.77
Item 7A. QUANTITATIVE &
QUALITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISKWe do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions.
Foreign Currency Exchange Rate Risk
A portion of our net sales are denominated in foreign currencies, most notably the Euro and the Japanese Yen. Future fluctuations in the value of the U.S. Dollar may affect the price competitiveness of our products outside the United States. For direct sales outside the United States, we sell in both U.S. Dollars and local currencies, which could expose us to additional foreign currency risks, including changes in currency exchange rates. Our operating expenses in countries outside the United States, are payable in foreign currencies and therefore expose us to currency risk. To the extent that management can predict the timing of payments under sales contracts or for operating expenses that are denominated in foreign currencies, we may engage in hedging transactions to mitigate such risks in the future. We expect the changes in the fair value of the
intercompany receivablesnet foreign currency assets arising from fluctuations in foreign currency exchange rates to be materially offset by the changes in the fair value of the forward contracts. As of June 30,2016,2019, we had no open forward contracts and all open positions had been settled.The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a foreign exchange policy to govern our forward contracts. These foreign currency forward contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other
income and expenses.expenses, net. We have not entered into any other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve management judgment.Interest Rate Risk
We maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income. At any time, a sharp rise or decline in interest rates could have a material adverse impact on the fair value of our investment portfolio. Likewise, increases and decreases in interest rates could have had a material impact on interest earnings for our portfolio.
The following table presents the hypothetical change in fair values in the financial instruments we held at June 30, 2016,We do not currently carry investments that are sensitive tochanges ininterestrates.rate risk.Our debt obligations consist of a variety of financial instruments that expose us to interest rate risk, including, but not limited to the Credit Facilities and the 3.75% Convertible Notes. The
modeling technique used measures the change in fairvalues arising from selected potential changes ininterest rates onour investment portfolio,the 3.75% Convertible Notes are fixed and the interest rate on the Credit Facilities are at variable rates, whichhadare tied to afair value“prime rate” and LIBOR. As of$47.2 million atJune 30,2016. Market changes reflect immediate hypothetical parallel shifts2019, borrowings under the Term Loan totaled $63.0 million with an annual interest rate of 5.50% plus 90-day LIBOR, and borrowings under the Revolving Credit Facility totaled $28.3 million with an annual interest rate of 3.50% plus 90-day LIBOR. If the amount outstanding under the Credit Facilities remained at this level for the next 12 months and interest rates increased or decreased by 50 basis point change, our annual interest expense would increase or decrease, respectively, approximately $0.4 million. Refer to Note 10, Debt to our consolidated financial statements included inthe yield curve of plus or minus 100, 75, 50 and 25 basis points.this Annual Report on Form 10-K for a discussion regarding our debt obligations.Decrease in interest rates Increase in interest rates (in thousands)
Change in interest rate–100 BPS –75 BPS –50 BPS –25 BPS 25 BPS 50 BPS 75 BPS 100 BPS Unrealized gain (loss)
$ 258 $ 217 $ 148 $ 75 $ (76 ) $ (153 ) $ (229 ) $ (306 ) Equity Price Risk
On August
1, 2011,7, 2017, we issued$100approximately $85.0 million aggregate principal amount of 3.75%Convertible Senior Notes. Upon conversion, we can settle the obligation by issuing our common stock, cash or a combination thereof at an initial conversion rate equal to 105.5548 shares of common stock per $1,000 principal amount of the 3.75% Convertible Senior Notes, which is equivalent to a conversion price of approximately $9.47 per share of common stock, subject to adjustment. There is no equity price risk if the share price of our common stock is below $9.47 upon conversion of the 3.75% Convertible Senior Notes. For every $1 that the share price of our common stock exceeds $9.47, we expect to issue an additional $10.6 million in cash or shares of our common stock, or a combination thereof, if all of the 3.75% Convertible Senior Notes are converted.In January 2016, we repurchased approximately $63.4 million in aggregate principal amount of our 3.75% Convertible Senior Notes due August 2016 for $66.6 million in cash. As $63.4 million of the 3.75% Convertible Senior Notes were settled in cash, a total of 6.7 million potentially dilutive common equity shares were no longer outstanding at June 30, 2016. In August 2016, we settled the remaining $36.6 million in aggregate principal amount of our 3.75% Convertible Senior Notes for $37.3 million in cash. As $36.6 million of the 3.75% Convertible Senior Notes were settled in cash, a total of 3.9 million potentially dilutive common equity shares are no longer outstanding in the first quarter of fiscal year 2017.On April 24, 2015, we issued approximately $70.3 million aggregate principal amount of 3.50% Series AConvertible Notes. Upon conversion, we can settle the obligation by issuing our common stock, cash or a combination thereof at an initial conversion rate equal to187.6877174.8252 shares of common stock per $1,000 principal amount of the3.50% Series A3.75% Convertible Notes, which is equivalent to a conversion price of approximately$5.33$5.72 per share of common stock, subject to adjustment. There is no equity price risk if the share price of our common stock is below$5.33$5.72 upon conversion of the3.50% Series A3.75% Convertible Notes. For every $1 that the share price of our common stock exceeds$5.33,$5.72, we expect to issue an additional$13.2$14.9 million in cash or shares of our common stock, or a combination thereof, if all of the3.50% Series A3.75% Convertible Notes are converted.78
Item 8. FINANCIAL
STATEMENTSSTATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Page No.Report of Independent Registered Public Accounting Firm
8480
Consolidated Balance Sheets
8581
Consolidated Statements of Operations and Comprehensive Loss
8682
Consolidated Statements of
Stockholders'Stockholders’ Equity8783
Consolidated Statements of Cash Flows
8884
Notes to Consolidated Financial Statements
8985
REPORT OF INDEPENDENTREGISTEREDREGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders
Accuray Incorporated
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Accuray Incorporated (a Delaware
Corporation)corporation) and subsidiaries (the"Company"“Company”) as of June 30,20162019 and2015, and2018, the related consolidated statements of operations and comprehensive loss,stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended June 30,2016. These consolidated2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statementsarepresent fairly, in all material respects, theresponsibilityfinancial position of theCompany's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.We
conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States).(“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 23, 2019 expressed an unqualified opinion.Adoption of new accounting standard
As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers and for incremental costs to obtain contracts with customers in fiscal year 2019 due to the adoption of the ASU No. 2014-09, Revenue from Contracts with Customers. The Company adopted this new standard using a modified retrospective approach.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An auditOur audits alsoincludes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Accuray Incorporated and subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 24, 2016, expressed an unqualified opinion./s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2006.
San
Francisco,Jose, CaliforniaAugust
24, 201623, 201980
Accuray Incorporated
Consolidated Balance Sheets(in thousands, except share and per share amounts)
June 30,
2019
June 30,
2018
June 30,
2016June 30,
2015Assets
ASSETS
Current assets:
Cash and cash equivalents
$ 119,771 $ 79,551 $
76,798
$
83,083
Short-term investments
47,239 64,306 Restricted cash
891 3,734 10,218
9,830
Accounts receivable, net of allowance for doubtful accounts of $826 and $709, respectively
56,810 77,727 Accounts receivable, net of allowance for doubtful accounts of $605 and
$251 as of June 30, 2019 and June 30, 2018, respectively
111,885
65,994
Inventories
115,987 106,151 120,823
108,540
Prepaid expenses and other current assets
16,098 15,991 24,205
15,569
Deferred cost of revenue
4,884 6,869 146
1,141
Total current assets
361,680 354,329 344,075
284,157
Property and equipment, net
27,878 31,829 17,122
23,698
Goodwill
57,848 58,054 57,770
57,855
Intangible assets, net
7,611 15,564 679
821
Deferred cost of revenue
1,996 1,500 Restricted cash
1,162
620
Other assets
12,020 5,497 17,373
11,576
Total assets
$ 469,033 $ 466,773 $
438,181
$
378,727
Liabilities and stockholders' equity
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$ 15,229 $ 13,096 $
29,562
$
19,694
Accrued compensation
18,725 21,934 31,150
28,992
Other accrued liabilities
22,184 18,720 32,742
22,448
Short-term debt
39,900 — Customer advances
22,123 19,385 20,395
22,896
Deferred revenue
92,051 96,780 78,332
75,404
Total current liabilities
210,212 169,915 192,181
169,434
Long-term liabilities:
Long-term other liabilities
10,984 10,934 9,646
8,608
Deferred revenue
17,665 10,489 26,639
20,976
Long-term debt
170,512 199,655 159,844
131,077
Total liabilities
409,373 390,993 388,310
330,095
Commitment and contingencies (Note 7)
Stockholders' Equity:
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized: 5,000,000 shares; no shares issued and outstanding
— — —
—
Common stock, $0.001 par value; authorized: 200,000,000 shares as of June 30, 2016 and 2015 respectively; issued and outstanding: 81,378,208 and 79,477,838 shares at June 30, 2016 and 2015, respectively
81 79 Additional paid-in capital
481,346 471,430 Accumulated other comprehensive loss
(960 ) (426 ) Common stock, $0.001 par value; authorized: 200,000,000 shares as of
June 30, 2019 and June 30, 2018, respectively; issued and outstanding:
88,521,511 and 86,129,256 shares at June 30, 2019 and June 30, 2018,
respectively
89
86
Additional paid-in-capital
535,332
521,738
Accumulated other comprehensive income (loss)
(10
)
1,093
Accumulated deficit
(420,807 ) (395,303 ) (485,540
)
(474,285
)
Total stockholders' equity
59,660 75,780 49,871
48,632
Total liabilities and stockholders' equity
$ 469,033 $ 466,773 Total liabilities and stockholders’ equity
$
438,181
$
378,727
The accompanying notes are an integral part of these consolidated financial statements.
81
Accuray Incorporated
Consolidated Statements of Operations and Comprehensive Loss(in thousands, except per share amounts)
Years Ended June 30, Years Ended June 30,
2016 2015 2014 2019
2018
2017
Net revenue:
Products
$ 193,299 $ 178,710 $ 173,607 $
196,665
$
183,898
$
179,611
Services
205,501 201,091 195,812 222,120
220,999
203,803
Total net revenue
398,800 379,801 369,419 418,785
404,897
383,414
Cost of revenue:
Cost of products
108,671 104,549 97,592 116,711
��
103,038
113,357
Cost of services
131,416 129,850 129,027 139,423
140,164
128,716
Total cost of revenue
240,087 234,399 226,619 256,134
243,202
242,073
Gross profit
158,713 145,402 142,800 162,651
161,695
141,341
Operating expenses:
Research and development
56,652 55,752 53,724 56,493
57,251
49,921
Selling and marketing
56,812 62,440 61,885 55,998
60,105
57,477
General and administrative
50,122 46,379 45,335 49,577
48,136
43,766
Total operating expenses
163,586 164,571 160,944 162,068
165,492
151,164
Loss from operations
(4,873 ) (19,169 ) (18,144 ) Income (loss) from operations
583
(3,797
)
(9,823
)
Other expense, net
(18,295 ) (18,621 ) (14,216 ) (14,927
)
(19,224
)
(18,718
)
Loss before provision for income taxes
(23,168 ) (37,790 ) (32,360 ) (14,344
)
(23,021
)
(28,541
)
Provision for income taxes
2,336 2,419 3,088 2,086
878
1,038
Net loss
$ (25,504 ) $ (40,209 ) $ (35,448 ) $
(16,430
)
$
(23,899
)
$
(29,579
)
Net loss—basic and diluted
$ (0.32 ) $ (0.51 ) $ (0.47 ) Weighted average common shares used in computing loss per share
Net loss per share—basic and diluted
$
(0.19
)
$
(0.28
)
$
(0.36
)
Weighted average common shares used in computing net loss per
share:
Basic and diluted
80,509 78,277 75,804 87,465
84,893
82,495
Net loss
$ (25,504 ) $ (40,209 ) $ (35,448 ) $
(16,430
)
$
(23,899
)
$
(29,579
)
Foreign currency translation adjustments
(48 ) (1,196 ) 25 Unrealized gain (loss) on investments
63 (95 ) 475 Foreign currency translation adjustment
(247
)
83
33
Reclassification adjustments on available for sale
investments, net of tax
—
89
(74
)
Change in defined benefit pension obligation
(549 ) (950 ) (567 ) (856
)
973
949
Comprehensive loss
$ (26,038 ) $ (42,450 ) $ (35,515 ) $
(17,533
)
$
(22,754
)
$
(28,671
)
The accompanying notes are an integral part of these consolidated financial statements.
82
Accuray Incorporated
Consolidated Statement ofStockholders'Stockholders’ Equity(in thousands, except share amounts)
Common Stock Accumulated
Other
Comprehensive
Income (Loss)Additional
Paid-in
CapitalAccumulated
DeficitTotal
Stockholders'
EquityShares Amount Balance at June 30, 2013
74,587,231 $ 75 $ 424,524 $ 1,882 $ (319,646 ) $ 106,835 Exercise of stock options, net
1,061,513 1 5,311 — — 5,312 Issuance of restricted stock
913,070 1 — — — 1 Issuance of common stock under employee stock purchase plan
650,315 — 3,536 — — 3,536 Share-based compensation
— — 11,038 — — 11,038 Embedded conversion feature on Convertible Note (Note 11)
— — 7,844 — — 7,844 Unamortized Convertible Senior Note issuance costs reclassified to equity
— — (243 ) — — (243 ) Tax withholding upon vesting of restricted stock units
(33,764 ) — (260 ) — — (260 ) Net loss
— — — — (35,448 ) (35,448 ) Cumulative translation adjustment
— — — 25 — 25 Unrealized gain on investments, net of tax
— — — 475 — 475 Change in defined benefit pension obligation
— — — (567 ) (567 ) Balance at June 30, 2014
77,178,365 $ 77 $ 451,750 $ 1,815 $ (355,094 ) $ 98,548 Exercise of stock options, net
529,331 2,563 — — 2,563 Issuance of restricted stock
1,174,531 1 (1 ) — — Issuance of common stock under employee stock purchase plan
719,279 1 4,032 — — 4,033 Share-based compensation
— — 13,746 — — 13,746 Tax withholding upon vesting of restricted stock units
(123,668 ) — (660 ) — — (660 ) Net loss
— — — — (40,209 ) (40,209 ) Cumulative translation adjustment
— — — (1,196 ) — (1,196 ) Unrealized loss on investments, net of tax
— — — (95 ) — (95 ) Change in defined benefit pension obligation
— — — (950 ) — (950 ) Balance at June 30, 2015
79,477,838 $ 79 $ 471,430 $ (426 ) $ (395,303 ) $ 75,780 Exercise of stock options, net
58,279 — 285 — — 285 Issuance of restricted stock
1,570,577 2 (2 ) — — — Issuance of common stock under employee stock purchase plan
729,259 — 3,588 — — 3,588 Share-based compensation
— — 12,396 — — 12,396 Unamortized Convertible Senior Note issuance costs reclassified to equity
— — (3,519 ) — — (3,519 ) Tax withholding upon vesting of restricted stock units
(457,745 ) — (2,832 ) — — (2,832 ) Net loss
— — — — (25,504 ) (25,504 ) Cumulative translation adjustment
— — — (48 ) — (48 ) Unrealized gain on investments, net of tax
— — — 63 — 63 Change in defined benefit pension obligation
— — — (549 ) — (549 ) Balance at June 30, 2016
81,378,208 $ 81 $ 481,346 $ (960 ) $ (420,807 ) $ 59,660 Common Stock
Additional
Paid-in
Accumulated
Other
Comprehensive
Accumulated
Total
Stockholders’
Shares
Amount
Capital
Income (Loss)
Deficit
Equity
Balance at June 30, 2016
81,378,208
$
81
$
481,346
$
(960
)
$
(420,807
)
$
59,660
Exercise of Stock options, net
112,482
—
463
—
—
463
Issuance of restricted stock
1,709,957
2
(2
)
—
—
—
Issuance of common stock under employee
stock purchase plan
870,037
1
3,345
—
—
3,346
Share-based compensation
—
—
13,154
—
—
13,154
Tax withholding upon vesting of restricted
stock units
(330,880
)
—
(1,419
)
—
—
(1,419
)
Net loss
—
—
—
—
(29,579
)
(29,579
)
Cumulative translation adjustment
—
—
—
33
—
33
Unrealized (loss) on investments, net of tax
—
—
—
(74
)
—
(74
)
Change in defined benefit pension obligation
—
—
—
949
—
949
Balance at June 30, 2017
83,739,804
$
84
$
496,887
$
(52
)
$
(450,386
)
$
46,533
Exercise of Stock options, net
108,800
—
437
—
—
437
Issuance of restricted stock
1,166,776
1
(1
)
—
—
—
Issuance of common stock under employee
stock purchase plan
921,583
1
3,333
—
—
3,334
Share-based compensation
—
—
12,289
—
—
12,289
Tax withholding upon vesting of restricted
stock units
(61,536
)
—
(293
)
—
—
(293
)
Retirement of Convertible Senior Notes
253,829
—
288
—
—
288
Allocated transaction cost in debt issuance
—
—
8,798
—
—
8,798
Net loss
—
—
—
—
(23,899
)
(23,899
)
Cumulative translation adjustment
—
—
—
83
—
83
Reclassification adjustments on available for sale
investments, net of tax
—
—
—
89
—
89
Change in defined benefit pension obligation
—
—
—
973
—
973
Balance at June 30, 2018
86,129,256
$
86
$
521,738
$
1,093
$
(474,285
)
$
48,632
Exercise of Stock options, net
114,932
—
489
—
—
489
Issuance of restricted stock
1,491,379
2
(2
)
—
—
—
Issuance of common stock under employee
stock purchase plan
911,741
1
3,021
—
—
3,022
Share-based compensation
—
—
10,086
—
—
10,086
Tax withholding upon vesting of restricted
stock units
(125,797
)
—
—
—
—
—
Adoption of new revenue recognition standard
—
—
—
—
5,175
5,175
Net loss
—
—
—
—
(16,430
)
(16,430
)
Cumulative translation adjustment
—
—
—
(247
)
—
(247
)
Change in defined benefit pension obligation
—
—
—
(856
)
—
(856
)
Balance at June 30, 2019
88,521,511
$
89
$
535,332
$
(10
)
$
(485,540
)
$
49,871
The accompanying notes are an integral part of these consolidated financial statements.
83
Accuray Incorporated
Consolidated Statements of Cash Flows(in thousands)
Years ended June 30, 2016 2015 2014 Cash Flows From Operating Activities
Net loss
$ (25,504 ) $ (40,209 ) $ (35,448 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
18,296 19,493 20,564 Share-based compensation
12,638 13,930 11,313 Amortization of debt issuance costs
1,728 1,503 1,408 Amortization and accretion of investment premiums/discounts
801 1,018 1,584 Accretion of interest on long-term debt
6,321 7,241 5,105 Provision for bad debt
127 (14 ) (707 ) Provision for write-down of inventories
2,444 1,507 2,836 Loss on disposal of property and equipment
153 62 666 Loss on extinguishment of debt
965 — — Provision (benefit) for deferred income taxes
(404 ) 664 92 Changes in assets and liabilities:
Restricted cash
2,660 (2,353 ) (163 ) Accounts receivable
22,951 (8,331 ) (14,786 ) Inventories
(10,502 ) (21,094 ) (8,341 ) Prepaid expenses and other assets
(5,988 ) 2,271 (5,241 ) Deferred cost of revenue
1,452 7,776 (4,875 ) Accounts payable
2,404 (1,822 ) (1,057 ) Accrued liabilities
(1,944 ) (8,614 ) 21,696 Customer advances
2,578 577 1,744 Deferred revenue
2,362 9,662 3,956 Net cash provided by (used in) operating activities
33,538 (16,733 ) 346 Cash Flows From Investing Activities
Purchases of property and equipment, net
(8,066 ) (10,445 ) (11,931 ) Purchases of investments
(64,356 ) (107,162 ) (44,155 ) Sales and maturities of investments
80,684 121,296 64,578 Net cash provided by investing activities
8,262 3,689 8,492 Cash Flows From Financing Activities
Proceeds from issuance of common stock
3,849 6,555 9,054 Repayments of debt
(66,406 ) — (417 ) Proceeds from debt, net of costs
64,632 — — Taxes paid related to net share settlement of equity awards
(2,832 ) (660 ) (260 ) Net cash provided by (used in) financing activities
(757 ) 5,895 8,377 Effect of exchange rate changes on cash and cash equivalents
(823 ) (5,646 ) 1,818 Net increase (decrease) in cash and cash equivalent
40,220 (12,795 ) 19,033 Cash and cash equivalents at beginning of period
79,551 92,346 73,313 Cash and cash equivalents at end of period
$ 119,771 $ 79,551 $ 92,346 Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes
$ 1,026 $ 3,184 $ 2,499 Cash paid for interest
$ 10,340 $ 7,207 $ 8,208 Non-cash financing activity:
Exchange of Convertible Notes (Note 13)
$ — $ — $ 7,844 Purchases of property and equipment recorded in accounts payable and accrued liabilities
$ 218 $ 638 $ 1,142 Transfers of equipment to inventory
$ 1,660 $ — $ — Years Ended June 30,
2019
2018
2017
Cash flows from operating activities
Net loss
$
(16,430
)
$
(23,899
)
$
(29,579
)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization
10,491
9,732
18,043
Share-based compensation
10,601
12,289
13,629
Amortization of debt issuance costs
1,528
1,629
3,785
Amortization and accretion of discount and premium on investments
—
(15
)
67
Loss on sales of investments
—
171
—
Accretion of interest on debt
3,371
3,376
4,052
Provision for (recovery of) bad debt, net
3,681
(73
)
119
Provision for write-down of inventories
2,340
1,603
2,253
(Gain) loss on disposal of property and equipment
2,588
(8
)
8
Loss on extinguishment of debt
—
3,452
—
Gain on termination of lease obligation
(1,007
)
—
—
Provision (benefit) for deferred income taxes
(86
)
30
(268
)
Changes in assets and liabilities:
Accounts receivable, short and long-term
(46,165
)
7,223
(15,732
)
Inventories
(14,165
)
(8,685
)
7,675
Prepaid expenses and other assets
(13,049
)
4,209
(4,437
)
Deferred cost of revenue, short and long-term
531
2,422
3,321
Accounts payable
9,456
2,002
2,189
Accrued liabilities
10,857
1,577
8,316
Customer advances
(2,549
)
6,189
(5,158
)
Deferred revenues, short and long-term
8,366
(4,893
)
(8,663
)
Net cash provided by (used in) operating activities
(29,641
)
18,331
(380
)
Cash flows from investing activities
Purchases of property and equipment, net
(4,311
)
(6,276
)
(5,031
)
Purchase of intangible assets
—
(333
)
(333
)
Purchases of investments
—
(5,940
)
(14,992
)
Sales and maturities of investments
—
30,315
38,179
Net cash provided by (used in) investing activities
(4,311
)
17,766
17,823
Cash flows from financing activities
Proceeds from employee stock plans
3,927
4,389
3,786
Taxes paid related to net share settlement of equity awards
—
(293
)
(1,419
)
Payments made to note and loan holders
—
(69,797
)
(105,158
)
Proceeds from debt, net of costs
19,968
66,111
48,253
Borrowings (repayments) under Revolving Credit Facility, net
4,578
(27,863
)
—
Net cash provided by (used in) financing activities
28,473
(27,453
)
(54,538
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
124
(346
)
197
Net increase (decrease) in cash, cash equivalents and restricted cash
(5,355
)
8,298
(36,898
)
Cash, cash equivalents and restricted cash at beginning of period
93,533
85,235
122,133
Cash, cash equivalents and restricted cash at end of period
$
88,178
$
93,533
$
85,235
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes
$
2,191
$
1,460
$
4,458
Cash paid for interest
$
9,761
$
9,187
$
9,927
Non-cash financing activities:
Exchange of Convertible Notes
$
—
$
6,641
$
—
Modification of Revolving Credit Facility
$
—
$
1,997
$
—
Non-cash investing activities:
Unpaid purchase of property and equipment at end of year
$
235
$
399
$
210
Unpaid purchase of intangible assets at end of year
$
—
$
—
$
667
Transfers from inventory to property and equipment
$
1,170
$
174
$
1,395
The accompanying notes are an integral part of these consolidated financial statements.
Accuray Inc
Accuray Incorporated
orporatedNotes to Consolidated Financial Statements
Note 1.
Description of BusinessThe Company and its Significant Accounting PoliciesOrganizationThe CompanyAccuray Incorporated (together with its subsidiaries, the
"Company"“Company” or"Accuray"“Accuray”)is incorporated in Delaware. The Companydesigns, develops and sells advanced radiosurgery and radiation therapy systems for the treatment of tumors throughout the body. The Company is incorporated in Delaware and has its principal place of business in Sunnyvale, California. The Company has primary offices in the United States, Switzerland, China, Hong Kong and Japan and conducts its business worldwide.The Company has its headquarters in Sunnyvale, California, with additional locations worldwide.2. Summary of Significant Accounting PoliciesBasis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.Balance Sheet ReclassificationThe accompanying consolidated financial statements have been prepared in accordance with United States accounting generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).Debt issuance costs of $3.2 million were reclassified from other assetsThe fair value measurement footnote disclosure for the year ended June 30, 2018 was revised to
long-term debtcorrect an error in theprior year'spresentation of the fair value for the 3.75% convertible notes. As a result, the fair value was increased by $15.9 million. The supplemental financial information footnote for the year ended June 30, 2018, was revised to correct an error in the presentation of unbilled fees and services. As a result, unbilled fees and services was increased by $0.6 million. These revisions have no impact on the consolidated balance sheetto conform toas of June 30, 2018 and thecurrentconsolidated statement of operations and comprehensive loss, stockholders’ equity and cash flows for the yearpresentation upon the adoption of Accounting Standard Update (ASU) No. 2015-03 as discussed below in Accounting Standard Update Recently Adopted.then ended.Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements. Key estimates and assumptions made by the Company relate to revenue recognition,
business combinations andassessment of recoverability of goodwill and intangible assets, valuation of inventories,share-basedshare‑based compensation expense, convertible notes, income taxes, allowance for doubtful accounts and loss contingencies. Actual results could differ materially from those estimates.Foreign Currency
The
Company'sCompany’s international subsidiaries use their local currencies as their functional currencies. For those subsidiaries, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at the average exchange rate. Resulting translation adjustments are excluded from the determination of net loss and are recorded in accumulated other comprehensive loss as a separate component ofstockholders'stockholders’ equity. Net foreign currency exchange transaction gains or losses are included as a component of otherincome (expense),expense, net, in theCompany'sCompany’s consolidated statements of operations and comprehensive loss.Fair Value Measurements
The carrying values of the
Company'sCompany’s financial instruments including cash equivalents, restricted cash, accounts receivable and accounts payable are approximately equal to their respective fair valuesAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)due to the relatively
short-termshort‑term nature of these instruments. Also refer to Note5,8, Fair Value Measurements,Financial Instruments,for further details.85
The Company considers currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the United States and internationally.
Investments
The Company classifies all its investments as
available-for-saleavailable‑for‑sale at the time of purchase since it ismanagement'smanagement’s intent that these investments be available for current operations, and as such, includes these investments asshort-termshort‑term investments on its balance sheets. These investments primarily consist of commercial paper, U.S. treasury securities, and U.S. government agency and corporate debt securities.Short-termShort‑term investments classified asavailable-for-saleavailable‑for‑sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), as a separate component ofstockholders'stockholders’ equity. Realized gains and losses on the sale of securities are determined by specific identification of eachsecurity'ssecurity’s cost basis. The Company regularly reviews its investment portfolio to determine if any security isother-than-temporarilyother‑than‑temporarily impaired, which would require it to record an impairment charge in the period any such determination is made. In making this judgment, management evaluates, among other things, the duration and extent to which the fair value of a security is less than its cost, the financial condition of the issuer and any changes thereto, andmanagement'smanagement’s intent to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. Other expense, net, includes interest, dividends, amortization of purchase premiums and discounts, realized gains and losses on sales of securities andother-than-temporaryother‑than‑temporary declines in the fair value of securities, if any.Concentration of Credit Risk and Other Risks and Uncertainties
The
Company'sCompany’s cash and cash equivalents are mainly deposited with several major financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances. The Companyhas placedplaces its investments withhigh-credithigh‑credit quality issuers. The Company does not invest an amount exceeding 5% of its combined cash, cash equivalents and investments in the securities of any one obligor or maker, except for obligations of the United States government, obligations of United States government agencies and money market accounts.OneThe Company had no customerrepresented more than 10% of total net revenue for the year ended June 30, 2016 and no customerthat represented 10% or more of total net revenue for the years ended June 30,20152019, 2018 and2014. One2017. The Company had one customer at June 30, 2019 and no customer at June 30, 2018 that accounted for18%more than 10% of accounts receivable,at June 30, 2016 and 2015.net.Accounts receivable are typically not collateralized.The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts are chargedAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)against the allowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within
management'smanagement’s expectations.Single-sourceSingle‑source suppliers presently provide the Company with several components. In most cases, if a supplier was unable to deliver these components, the Company believes that it would be able to find other sources for these components subject to any regulatory qualifications, if required.Restricted Cash
Restricted cash primarily consists of cash that is temporarily held in bank accounts which are under the control of the lender to the Revolving Credit Facility, certificates of deposit held as guarantees in connection with customer contracts and corporate leases as well as funds held as guarantees for
Value-AddedValue‑Added Tax (VAT) obligations in a foreign jurisdiction.86
Inventories are stated at the lower of cost (on a
first-in, first-outfirst‑in, first‑out basis) ormarketnet realizable value. Excess and obsolete inventories are written down based on historical sales and forecasted demand, as judged by management.Revenue Recognition
The
Company'sCompany adopted ASC Topic 606, Revenue from Contracts with Customers, on January 1, 2018. The Company’s revenue consists of product revenue resulting from the sale of systems, system upgrades and service revenue. The Company accounts for a contract with a customer when there is a legally enforceable contract between the Company and its customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. The Company’s revenues are measured based on the consideration specified in the contract with each customer, net of any discounts and taxes collected from customers that are remitted to government authorities.The Company’s revenue is primarily derived from sales of CyberKnife and TomoTherapy Systems and services, which include post-contract customer support
or PCS,(“PCS”), installation services, training and other professional services.The
Company records its revenues netmajority ofany value added or sales tax. In all salesthe Company's revenue arrangements consists of multiple performance obligations, which can include system, upgrades, installation, training, services, construction, and consumables. For bundled arrangements, the Companyrecognizes revenues when thereaccounts for individual products and services separately if a product or service ispersuasive evidenceseparately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer.The Company’s products are generally sold without a right of
an arrangement,return, and thefee isCompany’s contracts generally provide a fixedor determinable, collectiontransaction price. The Company may offer incentives in the form of discounts, including volume system discounts, which are included in the contract and used to calculate the final fixed price of thefeearrangement. These discounts may pertain to all performance obligations in a specific contract or may be allocated to a specific performance obligation. The Company also from time to time offers extended payment terms beyond one year and commissions or other forms of payment to customers. The Company estimates a financing component in transactions with payment terms extending beyond one year. This financing component isreasonably assuredrecognized as financing income at the time payment is received. The Company applies the practical expedient to not adjust for a significant financing component if the gap between payment and deliveryhas occurred. Payments received in advance of system shipment are recorded as customer advances and are recognized as revenue or deferred revenue upon product shipment or installation.was expected, at the contract inception, to be less than one year.The Company
assessesoffers customers theprobabilityopportunity to trade in their older systems for credit towards the purchase ofcollection based onanumber of factors, including past transaction history with the customer and credit-worthiness of the customer.new system. The Company generally does notrequest collateral from its customers. Ifprovide specifc trade-in prices or upgrade rights at theCompany determines that collection is not reasonably assured,time of purchase of theCompany will defer the fee and recognize revenue upon receipt of cash.The Company frequently enters into sales arrangements that contain multiple elementsoriginal system. Trade-in ordeliverables. For sale arrangements that contain multiple elements, the Company allocates the arrangement consideration to each elementupgrade transactions are based on therelative selling price method, whereby the relative selling price of each deliverable is determined using vendor specific objective evidence (VSOE) ofthen fair valueif it exists. VSOEoffair value for each element is based ontheCompany's standard rates charged forsystem and are separately negotiated taking into consideration circumstances existing at theproducttime of the trade-in orservice when such product or service is sold separately or based upon the price established by the Company's pricing committee when that product or service isupgrade. Accordingly, trade-ins and upgrades are notyet being sold separately. When the Company is not able to establish VSOE for all deliverablesconsidered separate performance obligations inan arrangement with multiple elements, whichsystem sales agreements. Traded-in systems generally can be reconditioned and may bedue to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, the Company attempts to determine the selling price of each element based on third-party evidence of selling price (TPE), as determined based on competitors' prices for similar deliverables when sold separately. When the Company is not able to establish selling price using VSOE or TPE, the Company uses its best estimate of selling price (BESP), in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the productAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)or service were sold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin. The determination of BESP is made through annual analysis of the Company's pricing practices and adjusted if necessary.The Company has a limited number of software offerings which are not required to deliver its systems' essential functionality and can be sold separately.resold. The Company accounts for the fair value of the traded-in system in the total consideration in the arrangement by including the net realizable value of the traded-in system less a normal profit margin.The stand-alone selling price (“SSP”) of performance obligations is determined based on observable prices at which the Company separately sells the products and services. If the SSP is not directly observable, then the Company will estimate the SSP considering market conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available. The SSP is generally assessed as a percentage of the list price. The contract consideration allocation is based on the SSP at contract inception. The consideration (net of any discounts) is allocated among separate
saleproducts and services in a bundle based on their individual SSP. For contract modifications that add additional goods or services or changes pricing, the most recent SSP is used for allocation to the remaining performance obligations.87
The Company recognizes revenue for certain performance obligations at the point in time when control is transferred, such as delivery of products and upgrades. Service revenue is recognized over the term of the service period as the customer benefits from the services throughout the service period. Revenue related to services performed on a time-and-materials basis is recognized when performed. Services recognized over a period of time comprise a single stand-ready performance obligation satisfied over time as our customers simultaneously receive and consume benefits from the Company's performance. This performance obligation constitutes a series of services that are substantially the same and provided over time using the same measure of progress. Revenues derived from these arrangements are recognized over time using an output method based upon the passage of time as this provides a faithful depiction of the pattern of transfer of control.
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer when the Company expects to generate future economic benefits from the related revenue-generating contracts. The Company capitalizes incremental contract acquisition costs, and amortizes such costs over a five year period, the period which the Company expects to benefit, based on historical service renewal rates, and expectations of future customer renewals. Most of the Company’s contract costs are associated with its internal sales force compensation program and a portion of its
software productsemployee bonus program. The Company capitalizes and presents these contract assets inaccordancePrepaid expenses and other current assets and Other assets on its consolidated balance sheets. These contract assets are amortized over a period of five years commencing upon the initial transfer of control of the system to the customer. The amortization of these contract assets is included in cost of sales, research and development, sales and marketing, and general and administrative expenses based on department headcount allocations in the consolidated statements of operations. The pattern of amortization is commensurate with theapplicable guidance for software revenue recognition. The Company's multiple-element arrangements may also include software deliverables that are subjectpattern of transfer of control of the performance obligations to thesoftware revenue recognition guidance;customer. The Company elected to use the practical expedient in ASC 340-40-25-4 and expense as incurred commissions related to service renewals and upgrades because the contract term is less than a year.The Company invoices its customers based on the billing schedules in
these cases,its sales arrangements. Payment terms vary from 30 to 90 days, or longer, from the date of invoice. Contract assets for the periods presented primarily represent the difference between the revenuefor these multiple-element arrangements is allocated to the software deliverable and the non-software deliverablesthat was recognized based on the relative standalone sellingprices of allprice of thedeliverables inrelated performance obligations satisfied and thearrangement using VSOE, TPEcontractual billing terms. Deferred revenue for periods presented primarily relates to service contracts where the service fees are billed up-front, generally quarterly orBESP.annually, prior to services being performed. The
Company regularly reviews VSOE, TPE and BESP for all of its products and services. As the Company's go-to-market strategies and other factors change, the Company may modify its pricing practices in the future, which may impact the selling prices of systems and services as well as VSOE, TPE and BESP of systems and services. As a result, the Company's future revenue recognition for multiple element arrangements could differ materially from that recorded in the current period.Product RevenueThe majority of product revenue is generated from sales of CyberKnife and TomoTherapy systems. If the Company is responsible for installation, the Company recognizes revenue after installation and acceptance of the system. Otherwise,associated deferred revenue is generally recognizedupon delivery, assuming all other revenue recognition criteria are met.The Company could sell its systems with PCS contracts, installation services, training, and at times, professional services. PCS contracts provide planned and corrective maintenance services, software updates, bug fixes, as well as call-center support.The Company records revenues from salesover the term ofsystems, product upgrades and accessories to distributors depending on the terms of the distribution agreement as well as terms and conditions executed for each sale, and once all revenue recognition criteria have been met.The Company's agreements with customers and distributors for system sales generally do not contain product return rights. Certain distributor agreements include parts inventory buy-back provisions upon distributorship termination. The Company accrues an inventory buy-back liability when and if such distributorship termination is expected and the liability can be estimated.Service RevenueService revenue is generated primarily from PCS (warranty period services and post warranty services), installation services, training, and professional services. PCS revenue is deferred and recognized overthe service period.Installation service revenue is recognized concurrent with system revenue. Training revenues are recognized when services are performed, and professional service revenues that areThe Company did notdeemed essential to the functionality of the systems are recognized as such services are performed.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)have any significant impairment losses on its contract assets for any period presented.Costs associated with service revenue are expensed when incurred, except when those costs are related to system upgrades where revenue recognition has been deferred. In those cases, the incremental costs are deferred and are recognized over the period of revenue recognition.Deferred Revenue and Deferred Cost of Revenue
Deferred revenue consists of deferred product revenue and deferred service revenue. Deferred product revenue arises from timing differences between the shipment of product and satisfaction of all revenue recognition criteria consistent with the
Company'sCompany’s revenue recognition policy. Deferred service revenue results from the advance payment for services to be delivered over a period oftime, usually one year.time. Deferred cost of revenue consists of the direct costs associated with the manufacturing of units and direct service upgrade costs for which the revenue has been deferred in accordance with theCompany'sCompany’s revenue recognition policies. Deferred revenue and associated deferred cost of revenue expected to be realized within one year are classified as current liabilities and current assets, respectively.Customer Advances
Customer advances represent payments made by customers in advance of product shipment. In general, customer advances are required for a contract to be recognized in our backlog.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-linestraight‑line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated on astraight-linestraight‑line basis over the remaining term of the lease or the estimated useful life of the asset, whichever is shorter. Machinery and equipment are depreciated over five years. Furniture and fixtures are depreciated over four years. Computer and office equipment and computer software are depreciated over three years. Repairs and maintenance costs, which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred.88
The Company capitalizes certain costs associated with obtaining or developing internal useCosts for the development of new softwareincluding external direct costs of materialproducts andservices. Software development costs relatingsubstantial enhancements toassets to be sold in the normal course of business are included in research and development andexisting software products are expensed as incurred until technological feasibilityis established. After technological feasibility ishas been established,materialat which time any additional costs would be capitalized. No costs associated with the development of software have been capitalized as the Company believes its current software developmentcosts are capitalized. The capitalized costprocess isthen amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenue, whichever is greater. To date, the period between achieving technological feasibility, which the Company has defined asessentially completed concurrent with the establishment ofa working model which typically occurs when the beta testing commences, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant.technological feasibility.Capitalized software costs are included in property, plant and equipment and amortized beginning when the software project is complete and the assets are ready for their intended use.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Impairment of
Long-LivedLong‑Lived AssetsThe Company reviews
long-livedlong‑lived assets, including intangible assets, property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable using pretax undiscounted cash flows. Impairment, if any, is measured as the amount by which the carrying value of along-livedlong‑lived asset exceeds its fair value.Goodwill and Purchased Intangible Assets
Goodwill is not amortized, but is evaluated for impairment on an annual basis and when impairment indicators are present. The Company has assessed that it has one operating segment and one reporting unit, and the consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit. The Company estimates the fair value of the reporting unit based on the
Company'sCompany’s closing stock price on the trading day closest to the annual review date multiplied by the outstanding shares on that date. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required. The Company adopted the new accounting guidance that simplifies the testing for goodwill impairment in the first quarter of fiscal 2019. Refer to Note 2, Recent Accounting Pronouncements. There was no impairment of goodwill identified in the fiscal years ended June 30,2016, 20152019, 2018 and2014.2017.Purchased intangible assets other than goodwill, including developed technology
and distributor license,are amortized on astraight-linestraight‑line basis over their estimated useful lives unless their lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets which range from approximately one tosixseven years.Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.Shipping and Handling
The
Company'sCompany’s billings for shipping and handling for product shipments to customers are included in cost of products. Shipping and handling costs incurred for inventory purchases are capitalized in inventory and expensed in cost of products.Advertising Expenses
The Company expenses the costs of advertising and promoting its products and services as incurred. Advertising expenses were approximately
$0.3 million,$0.5 million, $0.4 million and$0.6$0.4 million for the years ended June 30,2016, 20152019, 2018 and2014, respectively.2017, respectively, and are included in selling and marketing expense in the consolidated statements of operations.Research and Development Costs
Costs related to research, design and development of products are charged to research and development expense as incurred. These costs include direct
salaries,compensation, benefits, and other headcount related costs for research and development personnel; costs for materials used in research and development activities; costs for outside services and allocated portions of facilities and other corporateAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)costs. The Company has entered into research and clinical study arrangements with selected hospitals, cancer treatment centers, academic institutions and research institutions worldwide. These agreements support the
Company'sCompany’s internal research and development capabilities.89
Share-BasedShare‑Based CompensationThe Company issues
stock-basedstock‑based compensation awards to employees and directors in the form of stock options, restricted stock units (RSUs), performance stock units (PSUs), market stock units (MSUs) and employee stock purchase plan (ESPP) awards (collectively, awards).The Company measures and recognizes compensation expense for all
stock-basedstock‑based awards based on theawards'awards’ fair value.Share-basedShare‑based compensation for RSUs and PSUs is measured based on the value of theCompany'sCompany’s common stock on the grant date. The Company uses theMonte-CarloMonte‑Carlo simulation model to estimate the fair value of MSUs.Share-basedShare‑based compensation for employee stock options and ESPP awards are measured on the date of grant using aBlack-ScholesBlack‑Scholes option pricing model.Awards vest either on a graded schedule or in a lump sum. The Company determines the fair value of each award as a single award and recognizes the expense on a
straight-linestraight‑line basis over the service period of the award, which is generally the vesting period. The exercise price of stock options granted is equal to the fair market value of theCompany'sCompany’s common stock on the date of grant. Stock options expire ten years from the date of grant.Share-basedShare‑based compensation expense for stock options, RSUs, PSUs and the ESPP awards is based on awards ultimately expected to vest, and the expense is recorded net of estimated forfeitures. The Company recognizes expense for MSUs net of estimated forfeitures and does not adjust the expense for subsequent changes in the expected outcome of themarket-basedmarket‑based vesting conditions.Loss Contingencies
The Company is involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. The Company reviews these provisions quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Net Loss Per Common Share
Basic and diluted net loss per share is computed by dividing net loss attributable to stockholders by the weighted average number of common shares outstanding during the year.
Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share attributable to stockholders
follows:follows (in thousands):Years ended June 30, (in thousands) 2016 2015 2014 Numerator:
Net loss used in computing net loss per share
$ (25,504 ) $ (40,209 ) $ (35,448 ) Denominator:
Weighted average shares used in computing basic and diluted net loss per share
80,509 78,277 75,804 Years Ended June 30,
2019
2018
2017
Numerator:
Net loss used to compute basic and diluted loss per share
$
(16,430
)
$
(23,899
)
$
(29,579
)
Denominator:
Weighted average shares used to compute basic and diluted loss
per share
87,465
84,893
82,495
The potentially dilutive shares of the
Company'sCompany’s common stock resulting from the assumed exercise of outstanding stock options, the vesting ofRSUs, MSUsRestricted Stock Units (RSU), Market Stock Units (MSU) andPSUs,Performance Stock Units (PSU), and the purchase of shares under theESPP,Employee Stock Purchase Program (ESPP), as determined under the treasury stock method, are excluded from the computation of diluted net loss per share because their effect would have beenanti-dilutive. Theanti‑dilutive. Additionally, the 3.75% ConvertibleSeniorNotes due August1, 20162022 (the"3.75%“3.75% ConvertibleNotes"Notes”), the 3.50% Convertible Senior Notes due February 1, 2018 (the"3.50%“3.50% ConvertibleNotes"Notes”)and, the 3.50% Series A Convertible Notes (the"3.50%“3.50% Series A ConvertibleNotes"Notes”) due February 1, 2018 are included in the calculation of diluted net income per share only if their inclusion isdilutive. Fordilutive for periods during which theyears ended June 30, 2016, 2015 and 2014, the potentially dilutive shares under the Convertible Notesnotes wereexcluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive.outstanding.90
The following table sets forth all potentially dilutive securities excluded from the computation in the table above because their effect would have been
anti-dilutive:anti‑dilutive (in thousands):As of June 30,
2019
2018
2017
Stock options
5,220
2,684
2,463
RSUs, PSUs and MSUs
3,725
5,159
5,227
3.50% Convertible Notes
—
—
8,378
8,945
7,843
16,068
As of June 30, (in thousands) 2016 2015 2014 Stock options
2,377 2,537 3,209 RSUs, PSUs and MSUs
5,467 4,483 3,947 3.75% Convertible Notes
— — — 3.50% Convertible Notes
8,378 8,378 8,378 3.50% Series A Convertible Notes
— 2,896 4,985 16,222 18,294 20,519 Outstanding
ConvertiblesConvertible Notes—Diluted Share ImpactThe 3.75% Convertible Notes and the 3.50% Series A Convertible Notes have an optional physical (share), cash or combination settlement feature and contain certain conditional conversion features. The 3.50% Series A Convertible Notes were retired in February 2018. Due to the optional cash settlement feature and
management'smanagement’s intent to settle the principal amount thereof in cash, the shares of our common stock issuable upon conversionshares underlyingof the outstanding principal amount of the 3.75% Convertible Notesand 3.50% Series A Convertible Notes,outstanding as of June 30, 2019, totaling approximately3.914.9 million sharesand 13.2 million shares, respectively,of our common stock, were not included in thepotentiallybasic and diluted net loss per common sharecounttable above.The Company's average stock price did not exceed the conversion price of the 3.75% Convertible Notes as of June 30, 2016, 2015 and 2014. The number of premium shares included in the Company's diluted share count will vary with fluctuations in the Company's share price. Higher actual share prices result in a greater number of premium shares.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Income Taxes
The Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates prior to the completion and filing of tax returns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences in the treatment of items for tax purposes versus financial accounting purposes that may create net deferred tax assets and liabilities. The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of the
Company'sCompany’s assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses, research and development credit carryforwards and other deferred tax assets.The Company records a valuation allowance to reduce its deferred tax assets to the amount the Company believes is more likely than not to be realized. Because of the uncertainty of the realization of the deferred tax assets, the Company has recorded a full valuation allowance against its domestic and certain foreign net deferred tax assets.
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the
Company'sCompany’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The Company anticipates that except for$1.6$0.01 million in uncertain tax positions that may be reduced related to the lapse of various statutes of limitation, there will be no material changes in uncertain tax positions in the next 12 months.Accumulated Other Comprehensive Loss
The components of comprehensive loss consist of net loss, unrealized gains and losses on
available-for-saleavailable‑for‑sale investments, changes in foreign currency exchange rate translation and net changes related to a defined benefit pension plan. The unrealized gains and losses onavailable-for-saleavailable‑for‑sale investments, changes in foreign currency exchange rate translation and net changes related to the defined benefit pension plan are excluded from earnings and reported as a component ofstockholders'stockholders’ equity. The foreign currency translation adjustment results from those subsidiaries not using the United States dollar as their functional currency since the majority of their economic activities are primarily denominated in their applicable local currency. Accordingly, all assets and liabilities related to these operations are translated at the current exchange rates at the end of each period. The resulting cumulative translation adjustments are recorded directly to the accumulated other comprehensive loss account instockholders'stockholders’ equity. Revenues and expenses are translated at average exchange rates in effect during the period.91
Note 2. Recent Accounting
Standard Updates Not Yet EffectivePronouncementsAccounting Pronouncement Recently Adopted
In June
2016,2018, the Financial AccountingStandardsStandard Board(FASB)(“FASB”) issued AccountingStandardStandards Update(ASU)(“ASU”) No.2016-13 (ASU 2016-13)2018-7, Compensation – Stock Compensation (Topic 718) — Improvements to Nonemployee Share-Based Payment AccountingMeasurement of Credit Losses on Financial Instruments.ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held.This guidancewill become effective forsupersedes ASC 505-50 and expands theCompany beginning inscope of ASC 718 to include all share-based payment arrangements related to thethird quarteracquisition offiscal year 2020goods andmustservices from both nonemployees and employees. The amendments should beadopted usingapplied on a modified retrospectiveapproach, with certain exceptions. Earlybasis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The guidance permits early adoptionis permitted beginningand was adopted by the Company in thethirdfirst quarter of fiscal year 2019. TheCompany is evaluating the impact of theadoption of thisstandardASU did not have any impact onitsthe Company’s consolidated financial statements and related disclosures.In May 2017, the FASB issued ASU No. 2017-09,
TableCompensation—Stock Compensation (Topic 718)—Scope ofContentsModification Accounting. This guidance redefines which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting for a share-based payment. Modification accounting will not be applied if the following are the same immediately before and after the change: fair value, vesting conditions, and classification. The Company adopted ASU No. 2017-09 as required in the first quarter of fiscal year 2019 on a prospective basis. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715)—Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance revises the presentation of employer-sponsored defined benefit pension and other postretirement plans for the net periodic benefit cost in the statement of operations and requires that the service cost component of net periodic benefit be presented in the same income statement line items as other employee compensation costs for services rendered during the period. The other components of the net benefit costs are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. This guidance allows only the service cost component of net periodic benefit costs to be eligible for capitalization. In addition, changes to the presentation of benefit costs were required to be adopted retrospectively, while changes to the capitalization of service costs into inventories were required to be adopted prospectively. The standard permits, as a practical expedient, use of the amounts disclosed in the pension plans footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirement. The Company adopted ASU No. 2017-07 as required in the first quarter of fiscal year 2019, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No.
2016-09,2016-15,Improvements to Employee Share-Based Payment AccountingStatement of Cash Flows (Topic718)(ASU 2016-09). The new guidance simplifies several aspects230): Classification of Certain Cash Receipts and Cash Payments, which clarifies theaccounting for share-based payment transactions, including the income tax consequences,presentation and classification ofawards as either equity or liabilities,certain cash receipts andclassification oncash payments in the statement of cash flows. The amendments inthis standard are effectivethe update provide guidance on eight specific cash flow issues. The amendments to the guidance should be applied using a retrospective transition method forannual periods beginning after December 15, 2016,each period presented and,interim periods withinif it is impracticable to apply all of the amendments retrospectively for some of the issues, the amendments for thoseannual periods. Early adoption is permitted.issues would be applied prospectively as of the earliest date practicable. The Companyis currently evaluatingadopted ASU No. 2016-15 as required in theimpactfirst quarter ofthe pendingfiscal year 2019. The adoption of thisguidanceASU did not have any impact onitsthe Company’s consolidated financial statements and related disclosures.In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842)(ASU 2016-02). Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. ASU 2016-02 requires additional disclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. ASU 2016-02 requires adoption based upon a modified retrospective transition approach. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2016-02 on its consolidated financial statements and related disclosures.In January 2016, the FASB issued ASU No. 2016-01,
(ASU 2016-01)Recognition and Measurement of Financial Assets and FinancialLiabilitiesLiabilities.. ASU 2016-01This guidance changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted this ASU No. 2016-01 as required in the first quarter of fiscal year 2019 on a required modified retrospective approach. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.92
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other Topics (Topic 350)—Simplifying the Test for Goodwill Impairment. This guidance simplifies the measurement of goodwill by eliminating the Step 2 impairment test. The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This guidance will
becomebe effective for the Company beginning inthe thirdits first quarter of fiscalyear 2018 and must2021. The amendment is required to be adoptedusing a modified retrospective approach, with certain exceptions.prospectively. Early adoption is permitted forcertain provisions.goodwill impairment tests performed on testing dates after January 1, 2017. The Companyis evaluatingearly adopted this guidance in theimpactfirst quarter ofthefiscal year 2019 and adoption of thisstandardASU did not have any impact on its consolidated financial statements and related disclosures.In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with
Customers: TopicCustomers (Topic 606(ASU 2014-09)), to supersede nearly all existing revenue recognition guidance underU.S.GAAP. The core principle of ASU 2014-09 is to recognizerevenuesrevenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines afive stepfive-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existingU.S.GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is required to be adopted, using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additionaldisclosuresdisclosures. The Company adopted the new revenue standards asdefined per ASU 2014-09. Onof July9, 2015,1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date.The Company completed its assessment of the impact this guidance has on its consolidated financial statements and related disclosures. Based on that assessment, the Company concluded the significant impact areas were recognizing revenue from sales of systems at the time of transfer of control, which is generally upon delivery, the capitalization and amortization of incremental costs of obtaining a contract, primarily related to certain bonuses and sales commissions, change in SSP and the removal of software revenue recognition rules along with the elimination of revenue deferral for cash basis customers. Under the new standards, the Company capitalizes incremental contract acquisition costs, such as certain bonuses and sales commissions, and amortizes such costs over the period which the Company benefits, as estimated by management, which may extend beyond the initial contract term. The Company amortizes capitalized bonuses and sales commissions over a period of five years commencing upon the initial transfer of control of the system to the customer. The pattern of amortization is commensurate with the pattern of transfer of control of the performance obligations to the customer. The Company elected to use the practical expedient in ASC 340-40-25-4 and expense commissions related to service renewals and upgrades with a renewal contract term of one year or less as incurred. The Company recorded a net reduction to opening accumulated deficit of $5.1 million, net of tax, as of July 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to the deferral of incremental costs to obtain contracts.
Under ASC 606, product revenue for direct sales are accelerated to reflect transfer of control upon delivery while an element of installation is deferred until performed. Prior to the adoption of ASC 606, the Company deferred revenue until installation had occurred. The revenue recognition method for indirect sales and service revenues is unchanged under the new guidance.
Refer to Note 3, Revenue, to the Consolidated Financial Statement on this Annual report for the detailed impact of adopting ASC 606.
93
Accounting Pronouncements Not Yet Effective
In February 2018, the FASB
approved a one year deferralissued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows companies to reclassify from Accumulated Other Comprehensive Income to Retained Earnings stranded tax effects resulting from the enactment of theeffective period of ASU 2014-09.Tax Cuts and Jobs Act (the "Tax Act"). Thestandardguidance will be effective for the Companyforin its first quarter of fiscalyear 2019, but entities will2020. Early adoption is permitted. The guidance should bepermittedapplied either in the period of adoption or retrospectively toearly adopteach period in which thestandard aseffect of theoriginal effective date. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09change inMarch 2016, April 2016 and May 2016 within ASU 2016-08Revenue From Contracts With Customers: Principal vs. Agent Considerations, ASU 2016-10Revenue From Contracts withAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)2. Summary of Significant Accounting Policies (Continued)Customers: Identifying Performance Obligations and Licensing, and ASU 2016-12Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, respectively.the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company has not yet selected a transition method, has not yet determined whether it will elect early adoption and is currently evaluating the impact ofpendingthe adoption ofthese standardsthis standard on its consolidated financial statements and related disclosures.Accounting Standard Update Recently AdoptedIn
November 2015,August 2017, the FASB issued ASU No.2015-17 (Topic 740),2017-12, Derivatives and Hedging.Balance Sheet ClassificationThis guidance simplifies the application and administration ofDeferred Taxes(ASU 2015-17).hedge accounting. The guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The guidance is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance will be effective for the Company in its first quarter of fiscal 2020. Early adoption is permitted. The guidance is required to be adopted on a prospective basis. The Companyadoptedwill not early adopt and does not believe the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.In June 2016, the FASB issued ASU
2015-17 in its fiscal fourth quarter, an amended standard thatNo. 2016-13 Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requiresdeferred tax liabilitiesmeasurement and recognition of expected credit losses for financial assetstoheld. This guidance will beclassified as noncurrent in the consolidated balance sheet. This ASU iseffective forfiscal years beginning after December 2015, which would be effectivethe Company in the first quarter of fiscal2017 for the Company.2021 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permittedfor financial statements that have not been previously issued. ASU 2015-17 may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company has adopted this ASU on a retrospective basis to the comparable period presented at June 30, 2016 and it did not have a significant impact on the Company's financial statements.In April 2015, FASB issued ASU No. 2015-03,Simplifying the Presentation of Debt Issuance Costs(ASU 2015-03). The Company adopted ASU 2015-03beginning inits fiscal third quarter, an amended standard simplifying the presentation of debt issuance costs as a direct deduction from the carrying value of the debt liability rather than showing the debt issuance costs as an asset. ASU 2015-17 is effective for fiscal years beginning after December 2015, which would be effectivethe first quarter of fiscal20172020. The Company has not yet decided whether it will early adopt and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" (ASU 2016-02 or Topic 842), which requires lessees to recognize right-of-use (ROU) assets and lease liabilities arising from operating and financing leases with terms longer than 12 months in the consolidated balance sheets and to disclose key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements (ASU 2016-02 or Topic 842)" allowing an alternative modified transition method. Under this method, the cumulative-effect adjustment to the opening balance of retained earnings is recognized on the date of adoption with comparative prior periods not being restated. The new standard, including subsequent amendments is effective for our interim and annual periods beginning July 1, 2019. The Company will adopt the new guidance in the first quarter of fiscal year 2020 using the alternative modified transition basis, thereby recognizing the cumulative effect of initially applying Topic 842 as an adjustment to opening balance sheet on the adoption date, without revising the balances in comparative periods. The Company plans to elect the package of transitional practical expedients allowing, among other provisions, the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct cost, for any existing leases on the adoption date. For the facility and car leases, the Company intends to elect to account for lease and non-lease components as a single lease component. The Company intends to make an accounting policy election not to record leases that, at the lease commencement date, have a lease term of 12 months or less on the balance sheet. The Company has substantially completed its evaluation of the new lease guidance implementation and assessed the effect of the adoption on its consolidated financial statements. In connection with the adoption of the new guidance, the Company expects to recognize ROU asset ranging from $29.6 million to $31.6 million and lease liability ranging from $33.5 million to $35.5 million in its balance sheet as of July 1, 2019, with no impact to its results of operations and cash flows. The difference between the leased assets and lease liabilities represents the net position of existing prepaid rent and deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which will be effectively reclassified upon adoption to reduce the measurement of the leased assets. The Company believes that substantially all of its undiscounted future minimum operating lease commitments based on its current lease portfolio that were not recognized on its consolidated balance sheet as of June 30, 2019 but disclosed in Note 9 to the consolidated financial statements, will be subject to the new standard.
94
On July 1, 2018, the Company adopted ASC 606 electing the modified retrospective method for contracts that were still open as of July 1, 2018. Results for reporting periods after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance under ASC 605.
The beginning net cumulative-effect adjustment to retained earnings for the
Company. Earlyadoption of ASC 606 ispermitted under ASU 2015-17. Accordingly, ASU 2015-03 was applied retrospectivelyas follows:Balance at
Adjustment Due to
Balance as
Reported at
(Dollars in thousands)
July 1, 2018
ASC 606
June 30, 2018
Assets:
Account receivable, net
$
66,251
$
257
$
65,994
Deferred cost of revenue - current
677
(464
)
1,141
Prepaid expenses and other current assets
16,239
670
15,569
Other assets
17,416
5,840
11,576
Liabilities and Stockholders' Equity:
Other accrued liabilities
23,059
611
22,448
Deferred revenue - current
75,515
111
75,404
Long-term other liabilities
9,075
467
8,608
Accumulated deficit
(469,171
)
5,114
(474,285
)
Select consolidated balance sheets line items, which reflect the adoption of ASC 606 are as follows:
June 30, 2019
(Dollars in thousands)
As Reported
Adjustments
Balances
Without
Adoption
Assets:
Account receivable, net
$
111,885
$
6,568
$
105,317
Deferred cost of revenue - current
146
(20,124
)
20,270
Prepaid expenses and other current assets
24,205
3,508
20,697
Other assets
17,373
6,893
10,480
Liabilities and Stockholders' Equity:
Other accrued liabilities
32,742
760
31,982
Deferred revenue - current
78,332
(31,220
)
109,552
Long-term other liabilities
9,646
1,200
8,446
Accumulated deficit
(485,540
)
26,104
(511,644
)
95
Select consolidated statements of operations and comprehensive loss line items for the year ended June 30, 2019, which reflect the adoption of ASC 606 are as follows:
Year Ended June 30, 2019
(Dollars in thousands)
As Reported
Adjustments
Balances Without
Adoption
Net revenue
$
418,785
$
37,861
$
380,924
Cost of goods sold
256,134
19,257
236,877
Other expense, net
14,927
(622
)
15,549
Research and development
56,493
(307
)
56,800
Selling and marketing
55,998
(1,108
)
57,106
General and administrative
49,577
(657
)
50,234
Provision for income taxes
2,086
308
1,778
Net loss
(16,430
)
20,990
(37,420
)
Net loss per share - basic and diluted
$
(0.19
)
$
0.23
$
(0.42
)
The adoption of ASC 606 had no impact to net cash from or used in operating, investing or financing activities in the Company's consolidated statements of cash flows.
Contract Balances
The timing of revenue recognition, billings, and cash collections results in trade, unbilled receivables, and deferred revenues on the consolidated balance sheets. The Company may offer longer or extended payments of more than one year for qualified customers in some circumstances. At times, revenue recognition occurs before the billing, resulting in an unbilled receivable, which represents a contract asset. The contract asset is a component of accounts receivable and other assets for the current and non-current portions, respectively.
When the Company receives advances or deposits from customers before revenue is recognized, this results in a contract liability. It can take up to two and half years from the time of order to revenue recognition due to the
comparableCompany’s long sales cycle.Changes in the contract assets and contract liabilities are as follows:
June 30,
2019
July 1,
2018
Change
(Dollars in thousands)
Amount
Amount
$
%
Assets:
Unbilled accounts receivable – current (1)
$
5,260
$
3,218
2,042
63
Interest receivable – current (2)
361
—
361
100
Long-term accounts receivable (3)
4,116
6,833
(2,717
)
(40
)
Interest receivable – non-current (3)
1,255
611
644
105
Liabilities:
Customer advances
20,395
22,896
(2,501
)
(11
)
Deferred revenue – current
78,332
75,515
2,817
4
Deferred revenue – non-current
26,639
20,976
5,663
27
(1)
Included in accounts receivable on consolidated balance sheets
(2)
Included in prepaid expenses and other current assets on consolidated balance sheets
(3)
Included in other assets on consolidated balance sheets
96
During fiscal 2019, contract assets changed primarily due to the contractual timing of billings occurring after the revenues were recognized and payment terms exceeding 12 months. Contract liabilities changed due to timing of system sales for which the warranty has not yet started and was deferred.
Changes in deferred revenue from contracts with customers are as follows:
Year Ended
(Dollars in thousands)
June 30,
2019
Balance at beginning of period
$
96,491
New billings
427,264
Recognition of deferred revenue from opening balance
(78,614
)
Recognition of new additions
(340,170
)
Balance at end of period
$
104,971
Remaining Performance Obligations
Remaining performance obligations represent deferred revenue from open contracts for which performance has already started and the transaction price from signed contracts for which performance has not yet started. Service contracts in general are considered month-to-month contracts, and the Company has elected the practical expedient available in the guidance related to ASC 606, to not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.
As of June 30, 2019, total remaining performance obligations amounted to $863.8 million. Of this total amount, $84.5 million related to long-term warranty and service, which is expected to be recognized over the remaining warranty period
presentedfor systems that have been delivered. For systems that have been delivered but not yet installed, management estimates the timing of installation since warranty starts upon installation.The following table represents the Company's remaining performance obligations related to long-term warranty and
it did not haveservice as of June 30, 2019 and the estimated revenue expected to be recognized:Fiscal years of revenue recognition
(Dollars in thousands)
2020
2021
2022
Thereafter
Long-term warranty and service
$
32,853
$
27,361
$
13,333
$
10,964
For the remaining $779.3 million of performance obligations, the Company estimates 22% to 31% will be recognized in the next 12 months, and the remaining 69% to 78% will be recognized in the 30 months thereafter. The Company’s historical experience indicates that some of its customers will cancel or renegotiate contracts as economic conditions change or when product offerings change during the long sales cycle. Based on historical cancellation, about 17% to 27% of the Company’s contracts may never result in revenue due to cancellation.
The time bands reflect management’s best estimate of when the Company will transfer control to the customer and may change based on timing of shipment, readiness of customers’ facilities for installation, installation requirements, and availability of products.
Capitalized Contract Costs
The Company capitalizes and amortizes the incremental costs of obtaining a
significant impactcontract, primarily related to certain bonuses and sales commissions. The capitalized bonuses and sales commissions are amortized over a period of five years commencing upon the initial transfer of control of the system to the customer. The pattern of amortization is commensurate with the pattern of transfer of control of the performance obligations to the customer.97
The opening balance of capitalized costs to obtain a contract was $5.9 million as of July 1, 2018. As of June 30, 2019, the balance of capitalized costs to obtain a contract was $8.4 million. The Company has classified the capitalized costs to obtain a contract as a component of prepaid expenses and other current assets and other assets with respect to the current and non-current portions of capitalized costs, respectively, on the
Company's financial statements.3. Balance Sheet ComponentsCash and Cash Equivalentsconsolidated balance sheets. The Company incurred a $0.5 million impairment loss for the periods presented. During the year ended June 30, 2019, the Company recognized $2.2 million in expense related to the amortization of the capitalized contract costs.The following is a summary of cash and cash equivalents:(in thousands)June 30,
2016June 30,
2015Cash
$ 95,906 $ 73,444 Money market funds
13,362 6,107 Commercial paper
8,938 — Municipal government securities
1,565 — $ 119,771 $ 79,551 Accuray IncorporatedNote 4. Supplemental Financial InformationNotes toConsolidatedFinancial Statements (Continued)3.Balance SheetComponents (Continued)Accounts receivable, net
Accounts receivable, net consisted of the
following:following (in thousands):(in thousands)June 30,
2016June 30,
2015Accounts receivable
$ 54,974 $ 75,631 Unbilled fees and services
2,662 2,805 57,636 78,436 Less: Allowance for doubtful accounts
(826 ) (709 ) Accounts receivable, net
$ 56,810 $ 77,727 June 30,
2019
June 30,
2018
Accounts receivable
$
107,230
$
63,027
Unbilled fees and services
5,260
3,218
112,490
66,245
Less: Allowance for doubtful accounts
(605
)
(251
)
Accounts receivable, net
$
111,885
$
65,994
The Company received payment or had credits of $0.2 million and added $0.6 million to the allowance for doubtful accounts in fiscal 2019. The Company received payment or had credits of $0.2 million, added
$0.3$0.1 million and wrote off$0.01$0.1 million from the allowance for doubtful accounts in fiscal2016. The Company received payment or had credits of $0.4 million, added $0.4 million and wrote off $0.2 million from the allowance for doubtful accounts in fiscal 2015.2018.Financing receivables
A financing receivable is a contractual right to receive money, on demand or on fixed or determinable dates, that is recognized as an asset in the
Company'sCompany’s balance sheet. TheCompany'sCompany’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year andcapitalsales‑type leases, totaled$7.6$4.3 million and$1.6$6.9 million at June 30,20162019 and2015,2018, respectively, and are included in Other Assets in the consolidated balance sheets.Of the $7.6The $4.3 million in financing receivables at June 30,2016, $3.52019 related to contractual maturities of more than one year. Of the $6.9 million in financing receivables at June 30, 2018, $1.0 million related tosales-typesales‑type leases with customers while the remaining$4.1$5.9 million related to contractual maturities of more than one year.At June 30, 2015, the $1.6 million related to contractual maturities of more than one year with no capital leases. Due to the homogenous nature of the leasing transactions, the Company manages them on an aggregate basis when assessing and monitoring credit risk.The Company evaluates the credit quality of an obligor atleasecontract inception and monitors credit quality over the term of the underlying transactions. The Company performs a credit analysis for all new customers and reviews payment history, current order backlog, financial performance of the customers and other variables that augment or mitigate the inherent credit risk of a particular transaction. Such variables include the underlying value and liquidity of the collateral, the essential use of the equipment, the contract termof the leaseand the inclusion of credit enhancements, such as guarantees, letters of credit or security deposits.Accounts rated as low risk typically have the equivalent of a Moody's rating of Baa3 or higher, while accounts rated as moderate risk generally have the equivalent of a Ba1 or lower.The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significantnear-termnear‑term risk ofpayments. As of June 30, 2016, the sales-type lease portion of the financing receivables was rated at a moderate risk.non‑payment. The Company performed an assessment of the allowance for credit losses related to its financing receivables as of June 30,2016.2019. Based upon such assessment, the Companydid not record anrecorded adjustments of $3.6 million and less than $0.1 million to the allowance for credit losses related to such financing receivables as of June 30,20162019 and2015,as of June 30, 2018, respectively.98
Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)3. Balance Sheet Components (Continued)A summary of the
Company'sCompany’s financing receivables is presented asfollows:follows (in thousands):June 30, 2016
(in thousands)Lease
ReceivablesFinanced
Service
Contracts
and OtherTotal June 30, 2019
Lease
Receivables
Financed
Service
Contracts
and Other
Total
Gross
$ 4,998 $ 5,840 $ 10,838 $
—
$
13,288
$
13,288
Residual value
— — — —
—
—
Unearned income
(623 ) — (623 ) —
(1,535
)
(1,535
)
Allowance for credit loss
— — — —
(3,582
)
(3,582
)
Total, net
$ 4,375 $ 5,840 10,215 $
—
$
8,171
$
8,171
Reported as:
Current
$ 840 $ 1,778 $ 2,618 $
—
$
3,902
$
3,902
Non-current
3,535 4,062 7,597 —
4,269
4,269
Total, net
$ 4,375 $ 5,840 $ 10,215 $
—
$
8,171
$
8,171
June 30, 2015
(in thousands)Lease
ReceivablesFinanced
Service
Contracts
and OtherTotal June 30, 2018
Lease
Receivables
Financed
Service
Contracts
and Other
Total
Gross
$ — $ 2,674 $ 2,674 $
1,588
$
8,009
$
9,597
Residual value
— — — —
—
—
Unearned income
— — — (137
)
—
(137
)
Allowance for credit loss
— — — —
—
—
Total, net
$ — $ 2,674 2,674 $
1,451
$
8,009
$
9,460
Reported as:
Current
$ — $ 1,032 $ 1,032 $
432
$
2,139
$
2,571
Non-current
— 1,642 1,642 1,019
5,870
6,889
Total, net
$ — $ 2,674 $ 2,674 $
1,451
$
8,009
$
9,460
Actual cash collections may differ from the contracted maturities due to early customer buyouts, refinancing, or defaults.
FutureThere are no future minimum lease payments to be received as of June 30,2016 are presented as follows:Year Ending June 30,
(in thousands)Amount 2017
$ 1,046 2018
930 2019
930 2020
930 2021
930 2022
232 Total
$ 4,998 Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)3. Balance Sheet Components (Continued)Inventories2019.Inventories
Inventories consisted of the
following:following (in thousands):(in thousands)June 30,
2016June 30,
2015Raw materials
$ 50,480 $ 46,356 Work-in-process
20,190 15,445 Finished goods
45,317 44,350 Inventories
$ 115,987 $ 106,151 June 30,
2019
June 30,
2018
Raw materials
$
40,966
$
37,144
Work-in-process
18,152
17,703
Finished goods
61,705
53,693
Inventories
$
120,823
$
108,540
99
Property and equipment consisted of the
following:following (in thousands):June 30,
2019
June 30,
2018
(in thousands)June 30,
2016June 30,
2015Furniture and fixtures
$ 4,527 $ 4,674 $
2,728
$
2,927
Computer and office equipment
11,485 11,808 11,183
11,315
Software
11,104 10,992 11,236
11,307
Leasehold improvements
21,632 19,428 25,741
25,423
Machinery and equipment
47,171 47,031 45,472
47,065
Construction in progress
4,412 8,273 1,658
5,629
100,331 102,206 98,018
103,666
Less: Accumulated depreciation
(72,453 ) (70,377 ) (80,896
)
(79,968
)
Property and equipment, net
$ 27,878 $ 31,829 $
17,122
$
23,698
Depreciation and amortization expense related to property and equipment for the years ended June 30,
2016, 20152019, 2018 and20142017 was $8.1 million, $9.6 million and $10.3 million,$11.6 million and $12.2 million,respectively.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)3. Balance Sheet Components (Continued)Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by
component:component (in thousands):Foreign
Currency
Items
Unrealized
Gains
and (Losses)
on
Available-for-
Sale
Securities
Change in
Defined
Pension
Benefit
Obligation
Total
Balance at June 30, 2017
$
1,154
$
(89
)
$
(1,117
)
$
(52
)
Other comprehensive income
83
89
973
1,145
Balance at June 30, 2018
$
1,237
$
—
$
(144
)
$
1,093
Other comprehensive (loss)
(247
)
—
(856
)
(1,103
)
Balance at June 30, 2019
$
990
$
—
$
(1,000
)
$
(10
)
Consolidated Statements of Operations
Other expense, net consisted of the following (in thousands):
(in thousands)Foreign
Currency
ItemsUnrealized
Gains and
Losses on
Available-
for-Sale
SecuritiesChange in
Defined
Benefit
Pension
ObligationTotal Balance at June 30, 2014
$ 2,364 $ 18 $ (567 ) $ 1,815 Other comprehensive income (loss) before reclassifications
(1,196 ) (99 ) (950 ) (2,245 ) Amounts reclassified from accumulated other comprehensive income
— 4 — 4 Net current period other comprehensive loss
(1,196 ) (95 ) (950 ) (2,241 ) Balance at June 30, 2015
1,168 (77 ) (1,517 ) (426 ) Other comprehensive income (loss) before reclassifications
(47 ) 63 (549 ) (533 ) Amounts reclassified from accumulated other comprehensive income
— (1 ) — (1 ) Net current period other comprehensive income (loss)
(47 ) 62 (549 ) (534 ) Balance at June 30, 2016
$ 1,121 $ (15 ) $ (2,066 ) $ (960 ) Years Ended June 30,
(in thousands)
2019
2018
2017
Interest expense
$
(15,084
)
$
(14,959
)
(17,302
)
Foreign currency transaction loss
(665
)
(986
)
(1,267
)
Other (expense) income
822
(3,279
)
(149
)
Total other expense, net
$
(14,927
)
$
(19,224
)
$
(18,718
)
100
4. Foreign Exchange InstrumentsNote 5. Goodwill and Purchased Intangible AssetsGoodwill
Goodwill as of June 30, 2019 and 2018 and changes in the carrying amount of goodwill for the respective periods are as follows (in thousands):
As of June 30,
2019
2018
Balance at the beginning of the period
$
57,855
$
57,812
Currency translation
(85
)
43
Balance at the end of the period
$
57,770
$
57,855
In fiscal 2019, the Company performed its annual goodwill impairment test and determined that there was no impairment to goodwill. The Company will continue to monitor its recorded goodwill for indicators of impairment.
Purchased Intangible Assets
The Company’s intangible assets associated with purchased patent license are as follows (in thousands):
As of June 30, 2019
As of June 30, 2018
Useful
Lives
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
(in years)
Patent license
7
$
1,000
$
(321
)
$
679
$
1,000
$
(179
)
$
821
During fiscal 2017, the Company purchased a patent license with a useful life of seven years. The Company did not identify any triggering events that would indicate potential impairment of its definite‑lived intangible and long‑lived assets as of June 30, 2019 and 2018.
Amortization expense related to purchased intangible assets was $0.1 million, $0.1 million and $7.7 million for the years ended June 30, 2019, 2018 and 2017, respectively.
The estimated future amortization expense of purchased intangible assets as of June 30, 2019 is as follows (in thousands):
Year Ending June 30,
Amount
2020
143
2021
143
2022
143
2023
143
2024
107
$
679
101
The Company considers all highly liquid investments held at major banks, certificates of deposit and other securities with original maturities of three months or less to be cash equivalents.
The Company classifies all of its investments as available-for-sale at the time of purchase because management intends for these investments to be available for current operations and includes these investments on its balance sheet as short-term investments. Investments with original maturities longer than three months include commercial paper, U.S. agency securities, non-U.S. government securities and investment-grade corporate debt securities. Investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are recorded based on specific identification of each security’s cost basis.
In January 2018, the Company sold all of its available-for-sale investments for proceeds of $23.9 million and realized an insignificant loss on the sale of its investments. The Company reviews its investments quarterly to identify and evaluate investments that have an indication of possible impairment. Gross realized gains and losses were insignificant for the year ended June 30, 2018 and the year ended June 30, 2017. Upon the sale of its available for sale securities, the Company reclassified $77 thousand from other comprehensive income to Other expense, net.
The Company had an investment in a technology company, which had historically been accounted for using the cost method and recorded in Other assets. Subsequent to such company’s initial public offering in October 2017, the Company owned approximately 143,000 shares of such company’s common stock. Considering the liquidity in these shares at the time, the Company reclassified its investment from Other assets to short-term investments. In the fourth quarter of fiscal 2018, the Company sold all of its shares for a proceed of $0.4 million and recognized a loss on the sale of $0.1 million.
The Company had no available-for-sale securities at June 30, 2019 or 2018.
The Company held zero positions as of June 30, 2018 that were in an unrealized loss position. Gross realized gains and gross realized losses were insignificant for the years ended June 30, 2018 and 2017.
Note 7. Derivative Financial Instruments
The Company utilizes foreign currency forward contracts with
well-knownreputable financial institutions to manage its exposure of fluctuations in foreign currency exchange rates on certain intercompany balances and foreign currency denominated cash, customer receivables andcustomer receivables.liabilities. The Company does not use derivative financial instruments for speculative or trading purposes. These forward contracts are not designated as hedging instruments for accounting purposes. Principal hedged currencies include the Euro, Japanese Yen, Swiss Franc, and U.S. Dollar. The periods of these forward contracts range up to approximately three months and the notional amounts are intended to be consistent with changes in the underlying exposures. The Company intends to exchange foreign currencies for U.S. Dollars at maturity. There were no outstanding foreign currency forward contracts at the end of fiscal years20162019 and2015.2018.The following table shows the effect of forward contracts not designated as hedging instruments and foreign currency transactions gains and losses, which were included in
"Other“Other expense,net"net” on the consolidated statements of operations in fiscalyears:years (in thousands):Years ended June 30,
(in thousands)2016 2015 2014 2019
2018
2017
Foreign currency exchange gain (loss) on foreign contracts
$ (4,155 ) $ (1,355 ) $ (2,144 ) $
17
$
(2,461
)
$
(1,322
)
Foreign currency transactions gain (loss)
2,141 (1,196 ) 2,053 (682
)
1,475
55
102
Table of ContentsNote 8. Fair Value MeasurementsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)5. Financial InstrumentsThe Company considers all highly liquid investments held with various financial institutions, certificates of deposit and other securities with original maturities of three months or less to be cash equivalents.The Company classifies all of its investments as available-for-sale atFair value is an exit price representing thetime of purchase because it is management's intent that these investments are available for current operations and includes these investments on its balance sheets as short-term investments. Investments with original maturities longer than three months include commercial paper and investment- grade agency and corporate debt securities. Investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders' equity. Realized gains and losses are recorded based on specific identification of each security's cost basis.The Company defines fair value as the priceamount that would be received to sell an asset or paid to transfer a liability(an exit price)in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels of inputs that may be used to measure fair value, as follows:•Quoted prices for similar assets or liabilities in active markets;
•Quoted prices for identical or similar assets in non-active markets;
•Inputs other than quoted prices that are observable for the asset or liability; and
•Inputs that are derived principally from or corroborated by other observable market data.
Level
33——Unobservable inputs that cannot be corroborated by observable market data andreflectrequire the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilizemanagement'smanagement’s estimates of market participant assumptions.(1)(1)
These amounts represent principal and interest cash payments over the contractual life of the debt obligations, including anticipated interest payments that are not recorded on the Company’s consolidated balance sheet. Any conversion, premium, redemption or purchase of the 3.75% Convertible Notes would impact cash payments noted in the preceding table.
Level
11——Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.Level 2—
Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:TableThe Company had cash ofContentsAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)5. Financial Instruments (Continued)The following tables summarize the amortized cost, gross unrealized gains, gross unrealized losses$76.8 million andfair value by significant investment category for cash, cash equivalents and short-term investments:June 30, 2016 Estimated Market Value (in thousands) Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesCash and
Cash
EquivalentsShort-term
InvestmentsCash
$ 95,906 $ — $ — $ 95,906 $ — Level 1
Money market funds
13,362 — — 13,362 — 13,362 — — 13,362 — Level 2
Commercial paper
14,704 — — 8,938 5,766 U.S. government agencies securities
28,000 7 (17 ) — 27,990 U.S. Treasury securities
3,997 1 — — 3,998 Municipal debt securities
1,565 — — 1,565 — Corporate debt securities
9,491 — (6 ) — 9,485 57,757 8 (23 ) 10,503 47,239 Total
$ 167,025 $ 8 $ (23 ) $ 119,771 $ 47,239 June 30, 2015 Estimated Market Value (in thousands) Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesCash and
Cash
EquivalentsShort-term
InvestmentsCash
$ 73,444 $ — $ — $ 73,444 $ — Level 1
Money market funds
6,107 — — 6,107 — 6,107 — — 6,107 — Level 2
Commercial paper
11,989 — — — 11,989 U.S. government agencies securities
21,999 6 (14 ) — 21,991 Non-U.S. government securities
1,504 — (3 ) — 1,501 Corporate debt securities
28,891 — (66 ) — 28,825 64,383 6 (83 ) — 64,306 Total
$ 143,934 $ 6 $ (83 ) $ 79,551 $ 64,306 The Company's Level 2 investments in the table above are classified as Level 2 items because quoted prices in an active market are not readily accessible for those specific financial assets, or the Company may have relied on alternative pricing methods that do not rely exclusively on quoted prices to determine the fair value of the investments.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)5. Financial Instruments (Continued)Contractual maturities of available-for-sale securities$83.1 million at June 30,2016 were as follows:June 30, 2016 (in thousands) Amortized
CostFair
ValueDue in 1 year or less
$ 24,091 $ 24,091 Due in 1 - 2 years
23,163 23,148 Due in 2 - 3 years
— — $ 47,254 $ 47,239 The following table summarizes our available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired:Less Than 12 Months 12 Months or Greater Total (in thousands) Gross
Unrealized
LossesEstimated
Fair ValueGross
Unrealized
LossesEstimated
Fair ValueGross
Unrealized
LossesEstimated
Fair ValueJune 30, 2016
Debt securities:
Corporate debt securities
$ (3 ) $ 6,325 $ (3 ) $ 3,160 $ (6 ) $ 9,485 U.S. government agencies securities
— — (17 ) 19,988 (17 ) 19,988 Total
$ (3 ) $ 6,325 $ (20 ) $ 23,148 $ (23 ) $ 29,473 June 30, 2015
Debt securities:
Corporate debt securities
$ (45 ) $ 23,428 $ (21 ) $ 5,397 $ (66 ) $ 28,825 U.S. government agencies securities
(1 ) 11,004 (13 ) 10,987 (14 ) 21,991 Non—U.S. government securities
(3 ) 1,501 — — (3 ) 1,501 Total
$ (49 ) $ 35,933 $ (34 ) $ 16,384 $ (83 ) $ 52,317 The Company held a total of 11 positions as of2019 and June 30,2016 and 23 positions as of June 30, 2015 that were in an unrealized loss position. Based on the Company's review of these securities, the Company believes it had no other-than-temporary impairments on these securities as of June 30, 2016 and 2015 because it does not intend to sell these securities and believes it is not more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and gross realized losses were insignificant for the years ended June 30, 2016, 2015 and 2014.2018, respectively.Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis
The
Company's non-marketable equity investments and non-financial assets, such as goodwill, intangible assets, and property, plant, and equipment (measured at fair value if a write-down is recognized) are evaluated for impairment annually or when indicators of impairment exist. The fair value measurement of non-marketable equity investments is performed by a third-party analyst using Level 3 inputs. Non-financial assets such as identified intangible assets acquired in connection with an acquisition are measured at fair value using Level 3 inputs, which include discounted cash flowAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)5. Financial Instruments (Continued)methodologies, or similar techniques, when there is limited market activity and the determination of fair value requires significant judgment and estimates. In addition, in evaluating the fair value of goodwill impairment, further corroboration is obtained using our market capitalization. The Company did not record any impairment charges for non-marketable equity investments and non-financial asset in the fiscal years ended June 30, 2016, 2015, and 2014.The long-termCompany’s debt is measured on a non-recurring basis using Level 2 inputs based upon observable inputs of theCompany'sCompany’s underlying stock price and the time value of the conversion option, since an observable quoted price of the 3.75% Convertible Notesis(collectively the “Notes”) are not readily available. The Revolving Credit Facility and the Term Loan (collectively, the “Credit Facilities”) are valued at market interest rates, which it considers to be a level 2 fair value measurement. The carrying value of these financial instruments approximate its estimated fair value as there have not been significant changes in the Company’s credit quality or capital markets that would suggest changes in interest rates since these Credit Facilities were amended in May 2019.The following table summarizes the carrying
valuesvalue and estimated fairvaluesvalue ofthe Company's Convertible Notes:June 30, 2016 June 30, 2015 (in thousands) Carrying
ValueFair
ValueCarrying
ValueFair
Value3.75% Convertible Notes
$ 36,400 $ 36,487 $ 92,863 $ 102,645 3.50% Convertible Notes
43,195 51,450 42,332 65,230 3.50% Series A Convertible Notes
66,613 81,053 64,460 102,760 Secured Loan
64,204 64,204 — — Total
$ 210,412 $ 233,194 $ 199,655 $ 270,635 6. GoodwillCredit Facilities andPurchased Intangible AssetsGoodwillNotes (in thousands):Goodwill as of June 30, 2016 and 2015 and changes in the carrying amount of goodwill for the respective periods are as follows:(in thousands)June 30,
2016June 30,
2015Balance at the beginning of the period
$ 58,054 $ 58,091 Currency translation
(206 ) (37 ) Balance at the end of the period
$ 57,848 $ 58,054 June 30, 2019
June 30, 2018
Carrying
Value
Fair Value
Carrying
Value
Fair Value
3.75% Convertible Notes
$
72,730
$
84,227
$
69,382
$
86,666
Term Loan Facility
58,849
58,849
38,010
38,010
Revolving Credit Facility
28,265
28,265
23,685
23,685
Total
$
159,844
$
171,341
$
131,077
$
148,361
In fiscal 2016 the Company performed its annual goodwill impairment test. Based on this analysis, the Company determined that there was no impairment to goodwill. The Company will continue to monitor its recorded goodwill for indicators of impairment.103
Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)6. Goodwill and Purchased Intangible Assets (Continued)Purchased Intangible AssetsThe Company's intangible assets associated with completed acquisitions are as follows:June 30, 2016 June 30, 2015 (in thousands) Useful
LivesGross
Carrying
AmountAccumulated
AmortizationNet
AmountGross
Carrying
AmountAccumulated
AmortizationNet
Amount(in years) Developed technology
5 - 6 $ 46,743 $ (39,132 ) $ 7,611 $ 46,700 $ (31,136 ) $ 15,564 The Company did not identify any triggering events that would indicate potential impairment of its definite-lived intangible and long-lived assets as of June 30, 2016 and 2015.Amortization expense related to purchased intangible assets was $8.0 million, $7.9 million and $8.4 million for the years ended June 30, 2016, 2015 and 2014, respectively.The estimated future amortization expense of purchased intangible assets as of June 30, 2016 is as follows:Year Ending June 30,
(in thousands)Amount 2017
$ 7,568 2018
43 2019 and thereafter
— $ 7,611 7.Note 9. Commitments and ContingenciesOperating Lease
AgreementsandLong-termLong‑term Debt CommitmentsThe Company leases office and manufacturing space under
non-cancelablenon‑cancelable operating leases with various expiration dates throughDecember 2023.June 2025. Rent expense was $8.3 million,$8.0$9.2 million and$6.5$8.6 million for the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively. The terms of some of the facility leases provide for rental payments on a graduated scale. For these leases, the Company recognizes rent expense on astraight-linestraight‑line basis over the lease period, and has accrued for rent expense incurred but not paid.The Company is also required to make
semi-annualsemi‑annual interest payments on the Existing 3.75% ConvertibleNotes.Notes, and monthly interest payments on the Revolving Credit Facility and Term Loan. See Note13,10, DebtDebt, for details.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)7. Commitments and Contingencies (Continued)Future minimum lease payments under
non-cancelablenon‑cancelable operating lease agreements andlong-termlong‑term principal and interest on the 3.75% Convertible Notes and Credit Facilities as of June 30,20162019 are asfollows:follows (in thousands):Year Ending June 30,
Operating
Leases
Long-Term
Debt (1)
2020
$
8,675
$
9,807
2021
7,352
11,487
2022
7,159
29,086
2023
7,161
109,414
2024
5,118
51,672
Thereafter
2,610
—
Total
$
38,075
$
211,466
Year Ending June 30,
(in thousands)Operating
LeasesLong-term
Debt(1)2017
$ 8,812 $ 49,602 2018
8,330 125,923 2019
4,767 8,295 2020
4,128 8,015 2021
3,803 56,519 Thereafter
10,024 — Total
$ 39,864 $ 248,354 Purchase Commitments
The Company’s purchase commitments and obligations include all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which the Company has not received the goods or services and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allows the Company the option to cancel, reschedule, and adjust its requirements based on the
Company's consolidated balance sheet. Any conversion, premium, redemptionCompany’s business needs prior to the delivery of goods orpurchaseperformance ofConvertible Notes would impact cash payments notedservices, and hence, have not been included in thepreceding table.(1)Other income consists of interest income, investment gains and losses, and other miscellaneous income.•Secured leverage—defines the maximum amount of secured leverage that can be on the Company's books at a given point in time calculated by the total secured debt divided by the last twelve months' adjusted EBITDA;•Total leverage—defines the maximum amount of total leverage that can be on the Company's books at a given point in time calculated by the total debt divided by the last twelve months' adjusted EBITDA;•Fixed Charge Coverage Ratio—designed to ensure that the Company's cash fixed charges are met with adequate free cash flow based on a minimum coverage ratio to be set and maintained;•Minimum EBITDA—defines the minimum amount of adjusted EBITDA the Company must maintain and generate;•Maximum CapEx—defines how much cash the Company can use annually to pursue capital projects, purchase PP&E and other related activities during the life of the loan; and•Affirmative and negative covenants—defines reporting requirements, subsidiary asset restrictions, dividend distribution and repayment requirements among other general requirements.(a)We have the filed the following documents as part of this report:1.Consolidated Financial Statements(as set forth in Item 8)
2.Consolidated Financial Statement Schedules3Exhibits*Management contract or compensatory plan or arrangement.‡Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with the Securities and Exchange Commission.
Indemnities, Commitments and Guarantees
The Company enters into standard indemnification agreements with its landlords and all superior mortgagees and their respective directors,
officers'officers’ agents, and employees in the ordinary course of business. Pursuant to these agreements, the Company will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the landlords, in connection with any loss, accident, injury, or damage by anythird-partythird‑party with respect to the leased facilities. The term of these indemnification agreements is from the commencement of the lease agreements until termination of the lease agreements. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, historically the Company has not incurred claims or costs to defend lawsuits or settle claims related to these indemnification agreements. The Company has not recorded any liability associated with its indemnification agreements as it is not aware of any pending or threatened actions that represent probable losses as of June 30,2016.2018.104
Royalty AgreementIn January 2019, the Company, through its wholly-owned subsidiary, Accuray Asia, entered into an agreement with CNNC High Energy Equipment (Tianjin) Co., Ltd. (the “CIRC Subsidiary”), a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture, CNNC Accuray (Tianjin) Medical Technology Co. Ltd. (the “JV”), to manufacture and sell radiation oncology systems in China.The Company, through Accuray Asia, expects to make an initial capital contribution to the JV in stages, to be completed by December 31, 2019 in the form of in-kind contributions consisting of components for two full radiation oncology systems from our inventory in exchange for a 49% equity interest in the joint venture. Any remaining amount of capital contributions due, if not satisfied by such in-kind contributions, will be made by us, through Accuray Asia, in accordance with the schedule set by the board of directors of the JV.
Royalty Agreement
The Company has an exclusive license agreement with the Wisconsin Alumni Research Foundation (WARF), to make, use, sell and otherwise distribute products under certain of
WARF'sWARF’s patents anywhere in the world. The Company is required to pay WARF a royalty for each TomoTherapy System sold that includes the licensed technology. The license agreement expires upon expiration of the patents and may be terminated earlier if the Company so elects. WARF has the right to terminate the license agreement if the Company does not meet the minimum royalty obligation of $0.3 million per year, or if the Company commits any breach of the licenseagreement'sagreement’s covenants. The Company recorded royalty costs of $0.6 million,$0.6$0.5 million and$0.7$0.5 million for the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively, which were recorded in cost of revenue or deferred cost of revenue. The Company had accrued liabilities of approximately$0.1$0.2 million and $0.2 million at June 30,20162019 and2015,2018, respectively, related to this agreement.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)7. Commitments and Contingencies (Continued)Software License Indemnity
Under the terms of the
Company'sCompany’s software license agreements with its customers, the Company agrees that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of athird-party,third‑party, it will indemnify its customer licensees against any loss, expense, or liability from any damages that may be awarded against its customer. The Company includes this infringement indemnification in all of its software license agreements and selected managed services arrangements. In the event the customer cannot use the software or service due to infringement and the Company cannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then the Company may terminate the license and provide the customer a refund of the fees paid by the customer for the infringing license or service. The Company has not recorded any liability associated with this indemnification, as it is not aware of any pending or threatened actions that represent probable losses as of June 30,2016.2019.Litigation
From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. The Company records a provision for a loss when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Currently, management believes the Company does not have any probable and reasonably estimable losses related to any current legal proceedings and claims. Although occasional adverse decisions or settlements may occur,
except as described in the matters below,management does not believe that an adverse determination with respect to any of these claims would individually or in the aggregate materially and adversely affect theCompany'sCompany’s financial condition or operating results.For certain legal proceedings, management believes that there is a reasonable possibility that material losses may be incurred; however, the Company is unable to reasonably estimate a range of reasonably possible losses with respect to these matters.Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond theCompany'sCompany’s control. Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters that could have a material impact on its results of operations, financial position and cash flows.105
On April 28, 2011, a former supplier to TomoTherapy, Rotary Systems Incorporated ("Rotary Systems"3.50% Convertible Senior Notes due February 2018In February 2013, the Company issued 3.50% Convertible Senior Notes due 2018 (the “3.50% Convertible Notes”) under an indenture between the Company and The Bank of New York Mellon Trust Company, N.A.,
filed suit in Minnesota state court, Tenth Judicial District, Anoka County, against TomoTherapy alleging misappropriation of trade secrets,aswell as several other counts alleging various theories of injury. Rotary Systems alleges TomoTherapy misappropriated Rotary Systems' trade secrets pertaining to a component previously purchased from Rotary Systems, which TomoTherapy now purchases from a different supplier. The suit alleges TomoTherapy improperly supplied the alleged trade secrets to its present supplier, Dynamic Sealing Technologies Inc. (also a named defendant in the suit). Rotary Systems has made an unspecified claim for damages of greater than $50,000. TomoTherapy moved to dismiss the case and, on August 29, 2011, the court granted the motion to dismiss with respect to all counts other than the count alleging misappropriation of trade secrets. On May 21, 2012, the court gave Rotary Systems sixty days to identify the alleged trade secrets with specificity or face dismissal of its claim with prejudice. The court held a hearing on September 20, 2012 to review Rotary Systems' amended complaint. TomoTherapy filed a motion for summary judgment on the trade secret claim, the court ruled in favor of TomoTherapy on December 5, 2013, and RotaryAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)7. Commitments and Contingencies (Continued)Systems appealed. On December 22, 2014, the Minnesota Court of Appeals reversed the district court's dismissal of Rotary Systems' trade secrets claim and remanded it to the district court but affirmed the dismissal of Rotary Systems' other claims. In late October 2015, a final scheduling order was confirmed for the remanded claims and the parties are currently in the process of conducting discovery. On April 19, 2016, the parties entered into a written settlement agreement resolving the lawsuit. A stipulation of dismissal dismissing all claims by all parties with prejudice was filed with the court and the court entered an order on July 12, 2016 dismissing the case with prejudice.Cowealth MedicalOn February 27, 2014, Cowealth Medical Holding Co., Ltd. ("Cowealth"), Accuray's former distributor in China, submitted a request for binding arbitration with the International Chamber of Commerce International Court of Arbitration ("ICC") alleging, among other matters, that Accuray breached its distributor agreement with Cowealth by wrongfully terminating Cowealth as its distributor and misappropriated certain of Cowealth's confidential information. Cowealth was seeking damages of approximately $170.0 million and injunctive relief. Accuray filed counterclaims for damages of approximately $35.0 million. Accuray's answer and counterclaim were submitted to the ICC on May 12, 2014, and Cowealth served its reply on June 27, 2014. A hearing was held in Hong Kong between January 26, 2015 and February 6, 2015. The parties filed closing submissions and reply closing submissions in March 2015. On October 29, 2015, the ICC ruled that Accuray was liable for certain damages and awarded Cowealth approximately $3.4 million. On November 27, 2015, Cowealth applied for a correction to the award to revise the amount of damages upwards to approximately $5.5 million. On January 21, 2016, the arbitrator granted Cowealth's application for a correction on the grounds that the original award amount was a clerical error on the parttrustee. Holders of thearbitrator. Interest on3.50% Convertible Notes were entitled to convert their notes at any time until thefinal award amount will accrue at a rate of 5% per annum starting 30 days after the date the corrected award was issued until payment. Accordingly, management recorded a charge of $3.4 million for the first fiscal quarter ending September 30, 2015, and an additional $2.1 million for the second fiscal quarter ending December 30, 2015. The parties filed cost submissions and reply cost submissions in December 2015. The ICC released the final award on February 12, 2016, which dealt with the parties' claims for costsclose of thearbitration. Underbusiness day immediately preceding thefinal award, the arbitrator awarded costs to Cowealth at a net amountmaturity date of$2.4 million and rejected all other claims and requests. Prior to the rulingFebruary 1, 2018. The 3.50% Convertible Notes were convertible into common stock of theICC, no accrual was established in the Company's consolidated financial statements because management did not believe the likelihood ofCompany at anaward of damages or costs of arbitrationinitial conversion rate equal toCowealth were probable or estimable. In addition, the Company won several of its counterclaims including the right to be assigned the existing service contracts between Cowealth and Accuray customers, transfer to Accuray any regulatory clearances, licenses or permits obtained and held for the purposes of selling the CyberKnife System in China and deliver any consigned parts in their possession.8. Stockholders' EquityAt June 30, 2016, the Company had 13.2 million187.6877 shares of common stockreserved for future issuanceper $1,000 principal amount, which is equivalent to a conversion price of approximately $5.33 per share of common stock, subject to adjustment.On January 30, 2018, the Company entered into exchange agreements (the “Exchange Agreements”) with the holders of the 3.50% Convertible Notes, which amended the original settlement terms of the notes and allowed the Company to settle the then outstanding $13.0 million principal balance of the 3.50% Convertible Notes and accrued interest in cash at maturity, and any excess equity value over the original conversion price in shares. In exchange for the agreement to settle in cash, the Company agreed to pay $0.3 million exchange premium. The $0.3 million exchange premium was accounted for as debt extinguishment and included in Other expense, net.
On February 1, 2018, pursuant to the Exchange Agreements, the Company paid $13.2 million in cash to settle outstanding principal and accrued interest, and on February 7, 2018 issued 253,000 shares of the Company’s common stock to the 3.50% Convertible Notes holders. The total number of shares was determined using a three-day volume weighted averaging price period and based on a prescribed formula in the Exchange Agreements. As a result, the 3.50% Convertible Notes were repaid in full and were not outstanding at June 30, 2018.
3.50% Series A Convertible Senior Notes due February 2018
In April 2014, the Company issued 3.50% Series A Convertible Senior Notes due 2018 (the “3.50% Series A Convertible Notes”) under an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Series A Convertible Notes were entitled to convert their notes at any time on or after November 1, 2017 until the close of business on the business day immediately preceding the maturity date of February 1, 2018. The initial conversion rate is 187.6877 shares of the Company’s common stock per $1,000 principal amount, which represents an initial conversion price of approximately $5.33 per share of the Company’s common stock.
Pursuant to the original settlement terms, the Company made an irrevocable net share settlement election and paid cash for principal plus accrued interest upon maturity to holders who did not elect to convert. Prior to maturity, one note holder elected to convert their notes and receive a combination of cash and shares at settlement. The number of shares was determined based on a prescribed formula in the indenture. On February 1, 2018, the Company paid an aggregate amount of $27.0 million in cash and delivered 1,252 shares of its common stock to settle the 3.50% Series A Convertible Notes. As a result, the 3.50% Series A Convertible Notes were repaid in full and were not outstanding at June 30, 2018.
3.75% Convertible Senior Notes due July 2022
In August 2017, the Company issued $85.0 million aggregate principal amount of its 3.75% Convertible Senior Notes due 2022 (the “3.75% Convertible Notes”) under an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. $53.0 million aggregate principal amount of the 3.75% Convertible Notes were issued to certain holders of the Company’s outstanding 3.50% Convertible Notes and 3.50% Series A Convertible Notes (together, the “Existing Notes”) in exchange for approximately $47.0 million aggregate principal amount of the Existing Notes (the “Exchange”) and $32.0 million aggregate principal amount of the 3.75% Convertible Notes were issued to certain other qualified new investors for cash. The net proceeds of the cash issuance were used to repurchase approximately $28.0 million of Existing Notes (the “Repurchase”).
106
Holders of the 3.75% Convertible Notes may convert their notes at any time on or after April 15, 2022 until the close of the business day immediately preceding the maturity date. Prior to April 15, 2022, holders of the 3.75% Convertible Notes may convert their notes only under certain circumstances.
Upon conversion, the Company will have the right to pay cash, or deliver shares of common stock of the Company or a combination thereof, at the Company’s election. The initial conversion rate is 174.8252 shares of the Company’s common stock per $1,000 principal amount (which represents an initial conversion price of approximately $5.72 per share of the Company’s common stock). The conversion rate, and thus the conversion price, is subject to adjustment as further described below.
Holders of the 3.75% Convertible Notes who convert their notes in connection with a “make-whole fundamental change,” as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a “fundamental change,” as defined in the indenture, holders of the 3.75% Convertible Notes may require the Company to purchase all or a portion of their note at a fundamental change repurchase price equal to 100% of the principal amount of the 3.75% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. As of June 30, 2019, approximately $85.0 million aggregate principal amount was outstanding.
Revolving Credit Facility
On June 14, 2017, the Company entered into a credit and security agreement with a lender (the “Credit Agreement”). The Credit Agreement provides the Company with a revolving credit facility in the initial amount of $52.0 million (the “Revolving Credit Facility”). Availability for borrowings under the Revolving Credit Facility is subject to a borrowing base that is calculated as a function of the value of the Company’s eligible accounts receivable and eligible inventory, and the Company is required to maintain a minimum drawn balance of at least 30% of such availability. Interest on the borrowings under the Revolving Credit Facility is payable monthly in arrears at an annual interest rate of reserve-adjusted, 90-day LIBOR plus 4.50% and had
8.8initial maturity date of June 14, 2021.In December 2017, concurrently with the Term Loan Agreement (as defined below), the Company entered into an amendment to the Credit Agreement (the “Amendment” and, collectively with the Credit Agreement, the “Amended Credit Agreement”). The Amendment reduced the maximum borrowings under the Revolving Credit Facility to $32.0 million and extended the maturity date of the Revolving Credit Facility to December 15, 2022.
In July 2018, the Company amended both the Amended Credit Agreement and the Term Loan Agreement. The amendments provide for, among other things, adjustments to the Fixed Charge Coverage Ratio such that in the case of the Defined Periods (as defined in the Amended Credit Agreement and the Term Loan Agreement) for (i) the fiscal quarter ending June 30, 2018 as well as (ii) the fiscal quarter ending March 31, 2019, the Fixed Charge Coverage Ratio is not less than 0.75 to 1.00 and 0.50 to 1.00, respectively. Other significant terms remain unchanged.
In December 2018, the Company amended the Amended Credit Agreement (“Amendment 3”) which, among other things, updated the calculation of the deferred revolving loan origination fee such that it is based on the amount of time elapsed from the effective date of Amendment 3. Other significant terms remain unchanged.
In May 2019, the Company amended the Amended Credit Agreement to, among other things, decrease the interest rate from 90-day LIBOR plus 4.50% to 90-day LIBOR plus 3.50% and extend the maturity date to May 30, 2024 and update the calculation of the deferred revolving loan origination fee such that it is based on the amount of time elapsed from the effective date of the May 2019 amendment. The Company accounted for the amendment as a modification of existing debt and deferred an insignificant amount of offering costs on the consolidated balance sheet as of June 30, 2019. As of June 30, 2019, approximately $28.3 million of aggregate principal amount was outstanding under the Revolving Credit Facility, and $1.1 million of unamortized debt costs associated with the Revolving Credit Facility was included in other assets on the condensed consolidated balance sheet.
107
In December 2017, the Company entered into a credit and security agreement with a lender (the “Term Loan Agreement”). The Term Loan Agreement provides for an initial term loan of $40.0 million with an additional tranche of $20.0 million undrawn and available through December 31, 2018, if specified conditions are met (the “Term Loan”). In connection with the Amendment, the Company used a portion of the net proceeds from the initial advance to repay a portion of the outstanding borrowings under the Revolving Credit Facility. Interest on the Term Loan is payable monthly in arrears at an annual interest rate of 6.75% plus 90-day LIBOR. The Term Loan Agreement matures December 15, 2022 and, if prepaid, has fees equal to 3%, 2%, and 1% of the prepayment amount if such termination occurs within the first year, the second year, and the third year of funding, respectively. The term of the loan is 60 months with interest only for the first 24 months followed by straight-line amortization of principal for the remaining months. In addition, the Company will pay an annual administrative fee of 0.25% and a final payment of 4.0% of the Term Loan amount.
In December 2018, the Company drew an additional $5.0 million under the Term Loan Agreement and in connection therewith entered into the second amendment to the Term Loan Agreement (“Amendment 2”) which, among other things, (i) extended the term loan tranche 2 commitment termination date for the remaining $15.0 million unfunded commitment from December 31, 2018 to June 30, 2019; (ii) provided that term loan tranche 2 may be drawn in two separate advances; and (iii) updated the calculation of the prepayment fee such that it is based on the amount of time elapsed from the effective date of Amendment 2.
In May 2019, the Company amended the Term Loan Agreement to, among other things, increase the loan tranch 2 commitment by $0.5 million, extend the maturity date to May 30, 2024, decrease the annual interest rate from 6.75% plus 90-day LIBOR to 5.50% plus 90-day LIBOR, and modify the calculation prepayment fee such that it is based on the amount of time elapsed from the effective date of the May 2019 amendment. The Company accounted for the amendment as a modification of existing debt and recorded approximately $1.5 million of debt discount costs associated with the amendment against long-term debt on the consolidated balance sheets as of June 30, 2019.
As of June 30, 2019, approximately $63.0 million aggregate principal amount was outstanding.
The following table presents the carrying value of all Credit Facilities and 3.75% Convertible Notes (in thousands):
Revolving
Credit
Facility
3.75%
Convertible
Notes
Term Loan
Facility
Total
Carrying amount of equity conversion component
$
—
$
14,650
$
—
$
14,650
Principal amount
$
28,265
$
85,000
$
63,031
$
176,296
Unamortized debt costs
—
(2,687
)
(1,231
)
(3,918
)
Unamortized debt discount
—
(9,583
)
(2,951
)
(12,534
)
Net carrying amount
$
28,265
$
72,730
$
58,849
$
159,844
A summary of interest expense on the Credit Facilities and Notes is as follows (in thousands):
Year ended June 30,
2019
2018
2017
Interest expense related to contractual interest coupon
$
10,185
$
9,953
$
9,465
Interest expense related to amortization of debt discount
3,370
3,377
4,052
Interest expense related to amortization of debt issuance costs
1,529
1,629
3,785
Total
$
15,084
$
14,959
$
17,302
108
At June 30, 2019, the Company had 8.9 million shares of common stock reserved for issuance under the stock incentive plans and the employee stock purchase plan.
Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)9.Note 12. Stock Incentive Plan and Employee Stock Purchase PlanAs of June 30,
2016,2019, the Company hadtwothree outstanding stock incentive plans: the 2016 Equity Incentive Plan, or the 2016 Plan; the 2007StockIncentive Award Plan, or the 2007 Plan; and the 1998 Stock Incentive Plan, orthe1998the 1998 Plan. The20072016 Plan permits the granting of stock options, stock appreciation rights, restricted stock awards,or RSAsperformance shares, performance units, and restricted stock units, or RSUs. The vesting of RSUs granted under the20072016 Planmay be time-basedare primarily service‑based (over the requisite service period), performance-based,while the vesting of performance units granted under the 2016 Plan are primarily performance‑based, or PSUs, ormarket-based,market‑based, or MSUs. Only employees of the Company are eligible to receive incentive stock options.Non-employeesNon‑employees may be grantednon-qualifiednon‑qualified stock options.Stock options granted under the
20072016 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grantdate and no less than 85% of the fair value for non-qualified stock options.date. The stock options have 10 year contractual terms and generally become exercisable for 25% of the option shares one year from the date of grant and then ratably over the following 36 months.Time-basedService‑based RSUs granted under the equity plans generally vest 25% of the share units covered by the grant on each of the first through fourth anniversaries of the date of thegrant.grant, subject to the continued service of the grantee through each such date. However, certain of the outstanding RSUs under our equity plans vest 50% upon the first anniversary year of the grant date, and 50% upon the second anniversary year of the grant date. The Board of Directors has the discretion to use different vesting schedules.As of June 30,
2016,2019, the 2007 Plan and the 1998 Plan each continued to remain in effect; however, the Company can no longer grant equity awards underthe plan.such plans.The following table summarizes the
share-basedshare‑based compensation charges included in theCompany'sCompany’s consolidated statements of operations and comprehensiveloss:loss (in thousands):Years ended June 30, (in thousands) 2016 2015 2014 Cost of revenue
$ 1,677 $ 1,874 $ 1,912 Research and development
2,564 2,971 2,585 Selling and marketing
2,633 2,945 2,059 General and administrative
5,764 6,140 4,757 $ 12,638 $ 13,930 $ 11,313 Years ended June 30,
2019
2018
2017
Cost of revenue
$
1,666
$
1,866
$
1,991
Research and development
1,773
2,312
2,490
Selling and marketing
2,081
1,390
2,827
General and administrative
5,081
6,721
6,321
Total
$
10,601
$
12,289
$
13,629
The amount of capitalized
share-basedshare‑based compensation costs as components of inventoryfor the years endedwas insignificant at June 30,20162019, 2018 and20152017.Stock Options
The fair value of each option is estimated at the date of grant using the Black‑Scholes option pricing formula with the following assumptions:
Years Ended June 30,
2019
2018
2017
Risk–free interest rate
1.94% - 2.81%
1.98
%
1.76
%
Dividend yield
—
%
—
%
—
%
Expected term
5.31 - 5.51
5.25
5.12
Expected volatility
47.0% - 47.1%
43.9
%
46.4
%
109
Determining Fair Value of Stock Options
The fair value of each grant of stock options was
insignificant. For the year ended June 30, 2014,determined by the Companycapitalized share-based compensation costsusing the methods and assumptions discussed below. Each of$0.5 million, as components of inventory.these inputs is subjective and generally requires significant judgment to determine.Valuation and Amortization Method
Stock Options—The Company
did not grant anyestimates the fair value of its stock optionsinusing theyears ended June 30, 2016, 2015Black‑Scholes option‑pricing model. This fair value is then amortized over the requisite service periods of the awards.Expected Term—The Company estimates the expected term of stock option by taking the average of the vesting term and
2014.Tablethe contractual term ofContentsthe option, as illustrated by the simplified method.Expected Volatility
Accuray Incorporated—The expected volatility is derived from the Company’s historical stock volatility over a period approximately equal to the expected term of the options.Risk‑Free Interest Rate
Notes to Consolidated Financial Statements (Continued)—The risk‑free interest rate is based on the U.S. Treasury yield curve on the date of grant.Dividend Yield
9. Stock Incentive Plan—The dividend yield assumption is based on the Company’s history andEmployee Stock Purchase Plan (Continued)expectation of no dividend payouts.A summary of option activity under the
Company's Incentive PlanCompany’s incentive plan during the fiscal years is presentedbelow:below (in thousands except per share and term amounts):(in thousands, except per share and term amounts)Options
OutstandingWeighted
Average
Exercise
PriceWeighted
Average
Remaining
Contractual
Life (In Years)Aggregate
Intrinsic
Value
(in thousands)Balance at June 30, 2013
4,844 $ 7.15 6.17 $ 2,771 Options granted
— $ — Options exercised
(1,062 ) $ 5.01 Options forfeited/expired
(573 ) $ 9.49 Balance at June 30, 2014
3,209 $ 7.44 5.38 $ 8,251 Options granted
— $ — Options exercised
(529 ) $ 4.84 Options forfeited/expired
(143 ) $ 8.72 Balance at June 30, 2015
2,537 $ 7.91 5.10 $ 1,862 Options granted
— $ — Options exercised
(59 ) $ 4.89 Options forfeited/expired
(101 ) $ 7.53 Balance at June 30, 2016
2,377 $ 8.00 3.97 $ 452 Vested or Expected to vest at June 30, 2016
2,377 $ 8.00 3.97 $ 452 Exercisable at June 30, 2016
2,304 $ 8.06 3.89 $ 443 Options
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(In Years)
Aggregate
Intrinsic
Value
Balance at June 30, 2016
2,377
8.00
3.97
$
452
Options granted
760
5.05
Options exercised
(113
)
5.18
Options forfeited/expired
(561
)
13.38
Balance at June 30, 2017
2,463
6.05
5.42
$
191
Options granted
795
4.12
Options exercised
(109
)
4.02
Options forfeited/expired
(465
)
7.76
Balance at June 30, 2018
2,684
5.26
6.16
$
60
Options granted
3,359
4.09
Options exercised
(115
)
4.26
Options forfeited/expired
(708
)
5.51
Balance at June 30, 2019
5,220
4.50
7.97
$
11
Vested or Expected to vest at June 30, 2019
4,427
4.56
Exercisable at June 30, 2019
1,383
$
5.50
The aggregate intrinsic value in the table above represents the total
pre-taxpre‑tax intrinsic value (the difference between the fair value of theCompany'sCompany’s common stock on June30, 201628, 2019 of$5.19$3.87 and the exercise price of theoptions)options that would have been received by option holders if all options exercisable had been exercised on June 30,2016.2019. The total intrinsic value of options exercised in the years ended June 30,2016, 20152019, 2018 and20142017 was approximately $0.1 million,$1.4$0.1 million and$3.8$0.1 million, respectively.During the years ended June 30,
2016, 20152019, 2018 and2014,2017, the Company recognized$0.8$1.4 million,$1.1$0.6 million and$1.7$0.5 million, respectively, ofshare-basedshare‑based compensation expense for stock options granted to employees.110
Tax benefits from tax deductions for exercised options and disqualifying dispositions in excess of the deferred tax asset attributable to stock compensation costs for such options are credited to additional
paid-inpaid‑in capital. Upon adoption of ASU 2016-09 on July 1, 2017, the benefit are recognized against income taxes. Realized excess tax benefits related to stock options exercises was zero for each of the years ended June 30,2016, 20152019, 2018 and2014.2017.As of June 30,
2016,2019, there was approximately$0.1$6.7 million of unrecognized compensation cost net of estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted average period of0.473.25 years.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stock Incentive Plan and Employee Stock Purchase Plan (Continued)The following table summarizes information about outstanding and exercisable options at June 30,
2016:2019 (in thousands, except years and exercise price):Options Outstanding
Options Exercisable
Range of Exercise Prices
Number
Outstanding
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
Number
Outstanding
Weighted
Average
Exercise
Price
$3.71 – 4.00
584,809
8.27
$
3.97
235,615
$
4.00
$4.01 – 4.01
77,796
2.27
4.01
77,796
4.01
$4.10 – 4.10
3,291,100
9.42
4.10
—
—
$4.23 – 5.38
529,375
7.41
5.05
332,192
5.05
$5.61 – 6.58
529,752
2.08
6.09
529,752
6.09
$6.63 – 6.96
191,772
2.74
6.87
191,772
6.87
$7.06 – 7.06
4,800
2.75
7.06
4,800
7.06
$7.70 – 7.70
2,333
2.83
7.70
2,333
7.70
$8.01 – 8.01
2,250
2.00
8.01
2,250
8.01
$8.89 – 8.89
6,000
1.83
8.89
6,000
8.89
Total Outstanding
5,219,987
7.97
$
4.50
1,382,510
$
5.50
Options Outstanding Options Exercisable (in thousands, except years and exercise prices)
Exercise PricesNumber
OutstandingWeighted
Average
Remaining
Contractual
Life (Years)Weighted
Average
Exercise
PriceNumber
OutstandingWeighted
Average
Exercise
Price$4.00 - 4.01
332,613 4.49 4.01 332,613 4.01 $4.23 - 5.68
356,621 4.13 5.37 341,581 5.40 $5.74 - 6.28
443,640 5.33 6.15 416,552 6.14 $6.32 - 6.63
343,271 3.52 6.51 339,041 6.51 $6.75 - 6.82
13,500 5.22 6.77 13,500 6.77 $6.96
340,845 5.83 6.96 313,793 6.96 $7.06 - 28.47
546,686 1.52 15.28 546,686 15.28 Total Outstanding
2,377,176 3.97 $ 8.00 2,303,766 $ 8.06 Restricted Stock
The following table summarizes the activity of RSUs, PSUs and
MSUs:MSUs (in thousands, except fair value per share):(In thousands, except dollars)
Unvested Restricted StockRestricted
Stock Units
(000's)Performance
Stock Units
(000's)Market
Stock Units
(000's)Total Number
of Shares
Underlying
Stock Awards
(000's)Weighted
Average
Grant Date
Fair Value
Per ShareUnvested at June 30, 2013
2,424 556 407 3,387 $ 5.66 Unvested Restricted Stock
Restricted
Stock Units
Performance
Stock Units
Market
Stock Units
Total
Number of
Shares
Underlying
Stock
Awards
Weighted
Average
Grant Date
Fair Value
Per Share
Unvested at June 30, 2016
4,204
—
1,162
5,366
6.48
Granted
2,125 70 735 2,930 7.28 1,622
10
708
2,340
5.03
Vested
(888 ) (25 ) — (913 ) 8.70 (1,534
)
—
(176
)
(1,710
)
4.99
Cancelled/Forfeited
(545 ) (576 ) (336 ) (1,457 ) 5.44 (408
)
—
(361
)
(769
)
5.86
Unvested at June 30, 2014
3,116 25 806 3,947 6.24 Unvested at June 30, 2017
3,884
10
1,333
5,227
5.75
Granted
1,679 20 513 2,212 6.77 1,529
53
654
2,236
4.40
Vested
(1,150 ) (25 ) — (1,175 ) 6.73 (1,167
)
—
—
(1,167
)
6.24
Cancelled/Forfeited
(320 ) — (181 ) (501 ) 6.20 (546
)
—
(590
)
(1,136
)
5.87
Unvested at June 30, 2015
3,325 20 1,138 4,483 6.86 Unvested at June 30, 2018
3,700
63
1,397
5,160
5.03
Granted
2,563 — 585 3,148 6.12 1,386
—
—
1,386
3.68
Vested
(1,138 ) (20 ) (413 ) (1,571 ) 6.81 (1,481
)
(10
)
—
(1,491
)
5.44
Cancelled/Forfeited
(546 ) — (148 ) (694 ) 6.59 (521
)
(53
)
(756
)
(1,330
)
5.10
Unvested at June 30, 2016
4,204 — 1,162 5,366 $ 6.48 Unvested at June 30, 2019
3,084
—
641
3,725
$
4.34
111
As of June 30,
2016,2019, there was approximately$20.4$10.1 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock, which is expected to be recognized over a weighted average period of2.281.65 years.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stock Incentive Plan and Employee Stock Purchase Plan (Continued)Restricted Stock Units
The Company recognized
$7.6$7.2 million,$7.9$7.8 million and$6.4$9.5 million ofshare-basedshare‑based compensation expense, net of estimated forfeitures, related to RSUs during the years ended June 30,2016, 20152019, 2018 and2014.2017. The weighted average grant date fair value per share of RSUs was$6.01, $6.79$3.68, $4.57 and$7.32$5.03 for the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively.As of June 30, 2016, there was approximately $17.7 million of unrecognized compensation cost, net of estimated forfeitures, related to RSUs.The aggregate fair market value of RSUs that vested during the year ended June 30,20162019 was$7.6$6.2 million.Performance Stock Units
During fiscal 2012, the Compensation Committee approved the grant of 1.0 million PSUs to certain employees of the Company. The PSUs were cancelled in fiscal 2014 as it was determined that the Company did not achieve the requisite performance targets.The Compensation Committee approved the grant of zero,20,00053,000 and70,00010,000 PSUs to select employees of the Company in the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively. Of these PSUs,20,000, 25,00010,000, zero and25,000zero vested in the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively, due to the achievement of the requisite performance targets whilezero, zero and 38,00053,000 were cancelled in the year ended June 30, 2019. No PSUs were cancelled in the years ended June 30,2016, 20152018 and2014, respectively.2017.The Company recognized
$0.04 million, 0.2a benefit of $0.1 million and expense of $0.1 million, and zero, ofshare-basedshare‑based compensation expense, net of estimated forfeitures, related to PSUs during the years ended June 30,2016, 2015,2019, 2018, and2014,2017, respectively.Market Stock Units
The Compensation Committee approved the performance equity program, referred to as the market stock unit program, or MSU program, in October 2012. The
Company'sCompany’s MSU Program uses the Russell 2000 index as a performance benchmark and requires that theCompany'sCompany’s total stockholder return match or exceed that of the Russell 2000. Based on a sliding scale of how much theCompany'sCompany’s total stockholder return outperforms the Russell 2000 benchmark, the participating executives can earn up to a maximum of 150% of the target number of shares over two measurement periods. The Company uses aMonte-CarloMonte‑Carlo simulation to calculate the fair value of the award on the grant date. The Compensation Committee approved the grant of zero, 0.6million, 0.5million and 0.7 million MSUs to select employees of the Company in the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively. Of these MSUs,0.4zero, zero and 0.2 million0.5 million and zerovested in the years ending June 30,2016, 20152019, 2018 and2014,2017, respectively, due to theCompany'sCompany’s total stockholder return performance against the Russell 2000 index while0.10.8 million,0.20.6 million and0.30.4 million MSUs were cancelled in the years ended June 30,2016, 20152019, 2018 and2014, respectively. Assuming 100% performance target will be achieved, 0.2 million and 0.3 million of MSUs will vest by the end of fiscal2017,and 2018,respectively.The Company recognized
$3.0$1.0 million,$3.4$2.6 million and$1.8$2.5 million ofshare-basedshare‑based compensation expense, net of estimated forfeitures, related to MSUs during the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively. There were no MSUs granted during the year ended June 30, 2019. The weighted average grant date fair value per share of MSUs was$6.61, $6.64$4.11, and$7.18$5.20 for the years ended June 30,2016, 20152018 and2014,2017, respectively. As of June 30,2016,2019, there was approximately$2.8$1.0 million of unrecognized compensation cost, net of estimated forfeitures, related to MSUs.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)9. Stock Incentive Plan andEmployee Stock Purchase Plan(Continued)Employee Stock Purchase PlanUnder the
Company'sCompany’s Amended and Restated 2007 Employee Stock Purchase Plan, or ESPP, qualified employees are permitted to purchase theCompany'sCompany’s common stock at 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the fair market value on the specified purchase date. The ESPP is deemed compensatory and compensation costs are accounted for under ASC 718,Stock Compensation.Employees'Employees’ payroll deductions may not exceed 10% of their salaries. Employees may purchase up to 2,500 shares per period provided that the value of the shares purchased in any calendar year may not exceed $25,000, as calculated pursuant to the purchase plan.112
The Company estimates the fair value of ESPP shares at the date of grant using the
Black-ScholesBlack‑Scholes option pricing model. The weighted average assumptions were as follows:Years Ended June 30,201620152014Risk-free interest rate0.7% - 0.51%0.07% - 0.26%0.06% - 0.13%Dividend yield———Expected life0.5 - 1.00.5 - 1.00.5 - 1.0Expected volatility33.3% - 49.1%27.1% - 41.3%27.5% - 46.5%Years Ended June 30,
2019
2018
2017
Risk–free interest rate
2.11% - 2.72%
1.07% –2.28%
0.49% – 0.70%
Dividend yield
—%
—%
—%
Expected term
0.5 - 1.0
0.5 – 1.0
0.5 – 1.0
Expected volatility
30.9% - 60.0%
31.3% – 51.1%
24.6% – 42.0%
The
risk-freerisk‑free rate for the expected term of the ESPP option was based on the U.S. Treasury Constant Maturity rate for each offering period; expected volatility was based on the historical volatility of theCompany'sCompany’s common stock; and the expected term was based upon the offering period of the ESPP. For the years ended June 30,2016, 20152019, 2018 and2014,2017, the Company recognized$1.3$1.1 million,$1.3$1.2 million and$1.3$1.2 million, respectively, of compensation expense related to its ESPP.The Company issued
0.70.9 million and 0.9 million shares under the ESPP in fiscal20162019 and2015,2018, respectively, at a weighted average price per share of$4.92$3.31 and$5.61,$3.62, respectively. As of June 30,2016,2019, total unrecognized compensation cost related to the ESPP plan was $0.6 million, which the Company expects to recognize over a weighted average period of0.60.8 years.10.Note 13. Income TaxesLoss before provision for income taxes on the accompanying statements of operations and comprehensive loss included the following
components:Years Ended June 30, (in thousands) 2016 2015 2014 Domestic
$ (32,710 ) $ (46,178 ) $ (42,485 ) Foreign
9,542 8,388 10,125 Total worldwide
$ (23,168 ) $ (37,790 ) $ (32,360 ) Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued)components (in thousands):Years Ended June 30,
2019
2018
2017
Domestic
$
(23,799
)
$
(30,747
)
$
(35,227
)
Foreign
9,455
7,726
6,686
Total worldwide
$
(14,344
)
$
(23,021
)
$
(28,541
)
The provision for income taxes consisted of the
following:following (in thousands):Years Ended June 30,
Years Ended June 30, 2019
2018
2017
(in thousands) 2016 2015 2014 Current:
Federal
$ — $ — $ — $
—
$
—
$
—
State
17 33 78 32
63
14
Foreign
2,723 1,722 2,918 2,140
785
1,292
Total current
2,740 1,755 2,996 $
2,172
$
848
$
1,306
Deferred:
Federal
— — — —
—
—
State
— — — —
—
—
Foreign
(404 ) 664 92 (86
)
30
(268
)
Total deferred
(404 ) 664 92 (86
)
30
(268
)
Total provision for income taxes
$ 2,336 $ 2,419 $ 3,088 $
2,086
$
878
$
1,038
113
Income tax payable was
$2.3$1.6 million,$0.4$1.1 million and$2.0$1.2 million at June 30,2016, 20152019, 2018 and2014,2017, respectively. A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of operations and comprehensive loss is asfollows:Years Ended June 30, (in thousands)2016 2015 2014 U.S. federal taxes (benefit):
At federal statutory rate
$ (8,108 ) $ (13,226 ) $ (11,326 ) State tax, net of federal benefit
17 33 78 Stock-based compensation expense
701 579 332 Debt extinguishment
338 — — Other non-deductible permanent items
877 779 752 Change in valuation allowance
10,370 14,744 13,997 Credits
(795 ) (79 ) (114 ) Other
20 — (112 ) Foreign taxes
(1,084 ) (411 ) (519 ) Total
$ 2,336 $ 2,419 $ 3,088 Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued)follows (in thousands):Years Ended June 30,
2019
2018
2017
U.S. federal taxes (benefit):
At federal statutory rate
$
(3,012
)
$
(6,446
)
$
(9,988
)
State tax, net of federal benefit
32
63
14
Share-based compensation expense
1,128
1,712
802
Debt extinguishment
—
967
—
Other non-deductible permanent items
486
702
771
R&D credits
(877
)
(142
)
(359
)
Foreign taxes
(38
)
(1,295
)
(1,355
)
Other
58
(228
)
83
Transition Tax
—
3,348
—
Tax Cuts and Jobs Act
—
54,072
—
Global Intangible Low-Taxed Income
1,924
—
—
Change in valuation allowance
2,385
(51,875
)
11,070
Total
$
2,086
$
878
$
1,038
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the
Company'sCompany’s net deferred tax assets were asfollows:follows (in thousands):June 30,
June 30, 2019
2018
(in thousands)2016 2015 Deferred tax assets:
Federal and state net operating losses
$ 117,524 $ 118,998 $
77,228
$
77,870
Accrued expenses and reserves
6,392 6,110 7,497
6,290
Deferred revenue
4,853 2,721 2,897
2,985
Credits
18,168 17,022 R&D Credits
22,108
20,857
Share-based compensation expense
6,323 5,964 1,327
2,233
Capitalized research and development
5,882 3,959 3,343
3,988
Unicap
2,666 1,749 1,953
1,571
Fixed assets/intangibles
1,323
1,486
Section 163(j) interest
1,857
—
Other
859 372 1,582
1,650
Total deferred tax assets
162,667 156,895 121,115
118,930
Deferred tax liabilities:
Debt discount
(1,805 ) (4,318 ) Contract acquisition costs
(1,146
)
—
Section 481 adjustment
(1,140 ) — —
(239
)
Fixed assets/intangibles
(961 ) (4,846 ) Total deferred tax liabilities
(3,906 ) (9,164 ) (1,146
)
(239
)
Valuation allowance
(158,264 ) (147,722 ) (119,125
)
(117,674
)
Net deferred tax assets
$ 497 $ 9 $
844
$
1,017
The Company has not provided for U.S. income taxes on undistributed earnings of its foreign subsidiaries because it intends to permanently re-invest these earnings outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided as of June 30, 2016 was $22.4 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated to the U.S.As of June 30,
20162019, the Company had approximately$325.3$330.9 million and$145.6$131.6 million in federal and state net operating loss carryforwards, respectively. The federal and state carryforwards expire in varying amounts beginning in20192025 for federal and20172020 for state purposes.SuchAs of July 1, 2017, the Company adopted ASU 2016-09 and as a result recognized a stock compensation excess windfall that was converted into net operatingloss carryforwards include excess tax benefits from employee stock option exercises which, in accordance with guidance for income tax accounting, have not been recorded within the Company'slosses deferred taxasset balances. The Company will record approximately $3.8 million as a credit to additional paid-in capital as and when such excess benefits are ultimately realized.which did not materially affect the deferred tax balance.114
In addition, as of June 30,
2016,2019, the Company had federal and state research and development tax credits of approximately$17.9$20.6 million and$17.6$20.1 million, respectively.TheIf not utilized, the federal research credits will begin to expire in2019,2020, the California research credits have no expiration date, and the other state research creditsbeganwill begin to expire in2017.2020.Under the Internal Revenue Code
("IRC"(“IRC”) Sections 382 and 383, annual use of our net operating loss and research tax credit carryforwards to offset taxable income may be limited based on cumulativeAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)10. Income Taxes (Continued)changes in ownership.
An analysis of the impact of this provision through March 31, 2016 has been performed and it was determined that, althoughAlthough ownership changeshadhave occurred in the past, the carryovers should be available for utilization by the Company before they expire, providedwe generatethe Company generates sufficient future taxable income. There were no equity financings in the current fiscal year that would result in an ownership change under Section 382. The Company will continue to monitor the changes in equity that would affect the tax attributes as reported.Based on the available objective evidence and history of losses, the Company has established a 100% valuation allowance against the combined domestic net deferred tax assets of Accuray and TomoTherapy because of uncertainty surrounding the realization of such deferred tax assets.
In December 2017, the Tax Cuts and Jobs Act of 2017 (Tax Act) was signed into law which significantly amends the Internal Revenue Code of 1986, among other things reduces the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, imposes a one-time tax on offshore earnings at reduced rates regardless of whether they are repatriated, limits the tax deduction for interest expense to 30% of adjusted tax earnings, eliminates net operating loss carrybacks, and allows for federal net operating losses (“NOL”) to be carried over indefinitely for NOL generated after December 31, 2017.
As permitted by the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118"), the Company has completed its accounting analysis based on the guidance, interpretations, and data available as of June, 30, 2019. The Company has finalized its assessment of the transitional impacts of the Tax Act, which did not impact its tax expense for the fiscal year ended June 30, 2019. Any future legislative changes, as well as any other new or proposed Treasury regulations, which have yet to be issued, will continue to be assessed and evaluated.
The Tax Act has a requirement that certain income earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC’s U.S. shareholder. The income required to be included in gross income is referred to as global intangible low tax income (“GILTI”) and is defined under IRC Section 951A as the excess of the shareholder’s net CFC tested income over the net deemed tangible income return. The GILTI inclusion amount has been absorbed by net operating losses. The Company has made a policy decision to record GILTI tax as a current-period expense when incurred.
The Tax Act also enacted the Base Erosion and Anti-Abuse Tax (“BEAT”). The BEAT minimum tax under IRC Section 59A is applicable to the extent that the BEAT tax amount is greater than the regular corporate tax for a given year. This tax is applicable to companies with prior 3-year average annual gross receipts exceeding $500 million. The Company does not currently meet this threshold since its current average annual gross receipts is less than $500 million.
The Company continues to permanently re-invest its $39.7 million undistributed earnings of its foreign subsidiaries outside the U.S. Future repatriation of the Company's foreign earnings are subject to income taxes.
115
The aggregate changes in the balance of gross unrecognized tax benefits were as
follows:follows (in thousands):Years Ended June 30,
Years Ended June 30, 2019
2018
2017
(in thousands) 2016 2015 2014 Balance at beginning of year
$ 17,023 $ 17,169 $ 16,749 $
15,299
$
15,819
$
16,643
Tax positions related to current year:
Additions
1,811 726 1,489 934
823
1,190
Tax positions related to prior years:
Additions
449 29 — 580
—
299
Reductions
(2,640 ) (901 ) (1,069 ) (533
)
(1,343
)
(2,313
)
Balance at end of year
$ 16,643 $ 17,023 $ 17,169 $
16,280
$
15,299
$
15,819
The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the
Company'sCompany’s tax positionsinwith respect to legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The reduction in prioryear'syear’s tax positions primarily relates to lapses of applicable statutes of limitations. The Company anticipates that except for$1.6$0.01 million in uncertain tax positions that may be reduced related to the lapse of various statutes of limitation,and completion of tax examinations. Therethere will be no material changes in uncertain tax positions in the next 12 months. As of June 30,2016,2019, the amount of gross unrecognized tax benefits was$16.6$16.3 million of which$11.2$14.4 million would not affectthe Company's effectiveincome taxrate if realized.expense before consideration of any valuation allowance.The
Company'sCompany’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30,20162019 and2015,2018, the Company had approximately$0.5$0.06 million and$0.9$0.04 million, respectively, of accrued interest and penalties related to uncertain tax positions.The Company files income tax returns in the United States federal, various states and foreign jurisdictions. Due to tax attributes being carried forward and utilized during open years, the statute of limitations remains open for the U.S. federal jurisdiction and domestic states for tax years from 1999 and forward. The statutes of limitation with respect to the foreign jurisdictions where the Company files income tax returns vary from jurisdiction to jurisdiction and range from 3 to 10 years, and the material foreign jurisdictions are France, Switzerland, and
Japan, whose tax years remain open from 2012, 2011, and 2010, respectively.Japan.The Company is also subject to
periodicexamination of its income tax returns by the Internal Revenue Service (IRS) and other tax authorities, and in some cases the Company has received additional tax assessments which have not been significant. During fiscal year2016, the German tax authorities completed their audit on the Company's 2010 to 2013 tax returns with no significant adjustments. In addition,2017, the Companyhas beenreceived tax assessments from the Swiss Vaud Canton tax administration for the 2013, 2015 and 2016 tax periods. The Swiss total assessment of $0.1 million was settled in 2017. In fiscal 2018, the Company was audited by theSwiss Federal Tax AdministrationFrench tax authorities for theperiod 2011 throughfiscal periods 2015, 2016 andthe Company does not expect a significant impact on its results of operations.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)11. Other Expense, Net2017 with no material assessment.Other expense, net consisted of the following:Years Ended June 30, (in thousands)2016 2015 2014 Interest expense on convertible notes
$ (17,460 ) $ (16,518 ) $ (14,287 ) Foreign currency transaction loss
(2,014 ) (2,551 ) (91 ) Other income(1)
1,179 448 162 Total other expense, net
$ (18,295 ) $ (18,621 ) $ (14,216 ) 12. DebtFirst Lien Senior Secured Term Loan due January 2021 (Secured Loan)On January 11, 2016, the Company closed a $70.0 million first lien senior secured debt financing agreement with Cerberus Business Finance, LLC, an affiliate of Cerberus Capital Management, L.P (the "Secured Loan"). The proceeds of the loan are to be used to retire the 3.75% Convertible Notes at the earlier of August 2016 or when otherwise redeemed. The Secured Loan bears interest at a variable rate per annum equal to, at the Company's option, (i) the LIBOR Rate for one month plus an applicable margin of 7.00% (subject to a LIBOR Rate floor of 1.00% per annum), or (ii) a Reference Rate, which is the higher of 1) 3.25%, 2) Federal Funds Rate plus 0.5%, 3) the LIBOR rate for 1 month plus 1%, and 4) the US Prime Rate as published in the Wall Street Journal, plus an applicable margin of 4.75% per annum. The loan is repayable in consecutive quarterly installments of $875,000 with the final payment due on the final maturity date. The Secured Loan matures on the earlier of: (i) January 11, 2021 and (ii) the date that is 120 days prior to the scheduled maturity date of the 3.5% Convertible Notes maturing February 1, 2018 unless the Company has set aside specifically identifiable funds raised from new common equity or new debt equal to the then-outstanding principal amount of the 3.5% Convertible Notes. The net proceeds from the offering, after deducting the initial purchaser's discount and commission and the related offering costs, were approximately $65.5 million. The offering costs of $3.1 million and the initial purchaser's discount and commission of $1.4 million (both of which are recorded in Long-term Debt) are being amortized to interest expense using the effective interest method over five years. The Secured Loan is secured by first-priority liens on substantially all the assets of the Company.The covenants in the Secured Loan include:Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Debt (Continued)The Company may, at its election, repay the Secured Loan at any time and if so, the Company will be required to pay a prepayment premium of 2% if the Secured Loan is repaid or accelerated within the first year on the amount repaid and 1% if the Secured Loan is repaid or accelerated within the second year on the amount repaid.3.75% Convertible Senior Notes due August 2016On August 1, 2011, the Company issued the 3.75% Convertible Notes to certain qualified institutional buyers or QIBs. The 3.75% Convertible Notes were offered and sold to the QIBs pursuant to Rule 144A under the Securities Act of 1933, as amended or Rule 144A. The net proceeds from the $100 million offering, after deducting the initial purchaser's discount and commission and the related offering costs, were approximately $96.1 million. The offering costs and the initial purchaser's discount and commission (which are recorded in Other Assets) are both being amortized to interest expense using the effective interest method over five years. The 3.75% Convertible Notes bear interest at a rate of 3.75% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year, beginning on February 1, 2012. The 3.75% Convertible Notes will mature on August 1, 2016, unless earlier repurchased, redeemed or converted.The 3.75% Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.75% Convertible Notes may convert their 3.75% Convertible Notes at any time on or after May 1, 2016 until the close of business on the business day immediately preceding the maturity date. Prior to May 1, 2016, holders of the 3.75% Convertible Notes may convert their 3.75% Convertible Notes only under the following circumstances: (1) during any calendar quarter after the calendar quarter ending September 30, 2011, and only during such calendar quarter, if the closing sale price of the Company's common stock for each of 20 or more trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading-day period (such five consecutive trading-day period, the "Note Measurement Period") in which the trading price per $1,000 principal amount of 3.75% Convertible Notes for each trading day of thatNoteMeasurement Period was equal to or less than 98% of the product of the closing sale price of shares of the Company's common stock and the applicable conversion rate for such trading day; (3) if the Company calls any or all of the 3.75% Convertible Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate transactions as described in the Indenture. Upon conversion by holders of the 3.75% ConvertibleAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Debt (Continued)Notes, the Company will have the right to pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof, at the Company's election. At any time on or prior to the 33rd business day immediately preceding the maturity date, the Company may irrevocably elect to (a) deliver solely shares of common stock of the Company in respect of the Company's conversion obligation or (b) pay cash up to the aggregate principal amount of the 3.75% Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof in respect of the remainder, if any, of the Company's conversion obligation in excess of the aggregate principal amount of the 3.75% Convertible Notes being converted. The initial conversion rate is 105.5548 shares of the Company's common stock per $1,000 principal amount of 3.75% Convertible Notes (which represents an initial conversion price of approximately $9.47 per share of the Company's common stock). The conversion rate, and thus the conversion price, is subject to adjustment as further described below.Holders of the 3.75% Convertible Notes who convert their 3.75% Convertible Notes in connection with a "make-whole fundamental change," as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a "fundamental change," as defined in the Indenture, holders of the 3.75% Convertible Notes may require the Company to purchase all or a portion of their 3.75% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of 3.75% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.Prior to the maturity date, the Company may redeem for cash all or a portion of the 3.75% Convertible Notes if the closing sale price of its common stock exceeds 130% of the applicable conversion price (the initial conversion price is approximately $9.47 per share of common stock) of such 3.75% Convertible Notes for at least 20 trading days during any consecutive 30 trading-day period (including the last trading day of such period).In accordance with ASC 470-20, the Company separately accounts for the liability and equity conversion components of the 3.75% Convertible Notes. The principal amount of the liability component of the 3.75% Convertible Notes was $75.9 million as of the date of issuance based on the present value of its cash flows using a discount rate of 10%, our approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity conversion component was $24.1 million. A portion of the initial purchaser's discount and commission and the offering costs totaling $0.9 million was allocated to the equity conversion component. The liability component is being accreted to the principal amount of the 3.75% Convertible Notes using the effective interest method over five years.In January 2016, the Company repurchased approximately $63.4 million in aggregate principal amount of its 3.75% Convertible Senior Notes due August 2016 for $66.6 million in cash. As $63.4 million of the 3.75% Convertible Senior Notes were settled in cash, a total of 6.7 million potentially dilutive shares are no longer potentially outstanding from a net loss per share perspective, these shares were already noted in Note 2 above as being excluded due to being anti-dilutive in the current fiscal year of 2016. The Company recorded a charge in the third quarter of fiscal 2016 of approximately $1.0 million associated with the repurchase of the notes. Following such transactions, approximately $36.6 million aggregate principal amount of the 3.75% Convertible Notes remained outstanding. See Note 18Subsequent Eventregarding the retirement of the remaining 3.75% Convertible Notes.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Debt (Continued)3.50% Convertible Senior Notes due February 2018In February 2013, the Company issued $115.0 million aggregate principal amount of its 3.50% Convertible Notes to certain QIBs. The 3.50% Convertible Notes were offered and sold to the QIBs pursuant to Rule 144A. The net proceeds from the offering, after deducting the initial purchaser's discount and commission and the related offering costs, were approximately $110.5 million. The offering costs and the initial purchaser's discount and commission (which are recorded in Other Assets) are both being amortized to interest expense using the effective interest method over five years. The 3.50% Convertible Notes bear interest at a rate of 3.50% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year, which began on August 1, 2013. The 3.50% Convertible Notes will mature on February 1, 2018, unless earlier repurchased, redeemed or converted.In April 2014, through a series of transactions, the Company refinanced approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes with approximately $70.3 million aggregate principal amount of the Company's new 3.50% Series A Convertible Senior Notes due 2018 (the "3.50% Series A Convertible Notes").The 3.50% Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Convertible Notes may convert their 3.50% Convertible Notes at any time until the close of business on the business day immediately preceding the maturity date. The 3.50% Convertible Notes are convertible, as described below into common stock of the Company at an initial conversion rate equal to 187.6877 shares of common stock per $1,000 principal amount of the 3.50% Convertible Notes, which is equivalent to a conversion price of approximately $5.33 per share of common stock, subject to adjustment.Holders of the 3.50% Convertible Notes who convert their 3.50% Convertible Notes in connection with a "make-whole fundamental change", as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a "fundamental change," as defined in the Indenture, holders of the 3.50% Convertible Notes may require the Company to purchase all or a portion of their 3.50% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of 3.50% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.In accordance with guidance in ASC 470-20,Debt with Conversion and Other Optionsand ASC 815-15,Embedded Derivatives, the Company determined that the embedded conversion components of the 3.50% Convertible Note do not require bifurcation and separate accounting. The remaining $44.7 million principal amount of the 3.50% Convertible Note has been recorded in Long-term Debt on the consolidated balance sheet as of June 30, 2016.3.50% Series A Convertible Senior Notes due February 2018On April 17, 2014, the Company entered into note exchange agreements with certain holders (the "Participating Holders") of the 3.50% Convertible Notes to refinance approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes with approximately $70.3 million aggregate principal amount of the 3.50% Series A Convertible Notes. Pursuant to the note exchange agreements, the Company also paid the Participating Holders an aggregate of approximately $0.4 million in cash in connection with such transactions. The principal amount of 3.50% Convertible Notes refinanced for each $1,000 principal amount of the 3.50% Series A Convertible Notes was $1,000 and the amount inAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Debt (Continued)cash paid per $1,000 principal amount of such 3.50% Convertible Notes delivered was determined in individual negotiations between the Company and each Participating Holder. The Series A Convertible Notes have the same interest rate, maturity and other terms as the 3.50% Convertible Notes, except that the 3.50% Series A Convertible Notes are convertible into cash, shares of the Company's common stock or a combination of cash and shares of common stock, at the Company's option.The 3.50% Series A Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Series A Convertible Notes may convert their Securities at any time on or after November 1, 2017 until the close of business on the business day immediately preceding the maturity date. Prior to November 1, 2017, holders of the 3.50% Series A Convertible Notes may convert their Securities only under the following circumstances: (1) during any calendar quarter after the calendar quarter ending September 30, 2014, and only during such calendar quarter, if the closing sale price of the Company's common stock for each of 20 or more trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading-day period (such five consecutive trading-day period, the "Note Measurement Period") in which the trading price per $1,000 principal amount of 3.50% Series A Convertible Notes for each trading day of that Securities Measurement Period was equal to or less than 98% of the product of the closing sale price of shares of the Company's common stock and the applicable conversion rate for such trading day; or (3) upon the occurrence of specified corporate transactions as described in the Indenture. Upon conversion by holders of the 3.50% Series A Convertible Notes, the Company will have the right to pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof, at the Company's election. At any time on or prior to the 17th business day immediately preceding the maturity date, the Company may irrevocably elect to (a) deliver solely shares of common stock of the Company in respect of the Company's conversion obligation or (b) pay cash up to the aggregate principal amount of the 3.50% Series A Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof in respect of the remainder, if any, of the Company's conversion obligation in excess of the aggregate principal amount of the 3.50% Series A Convertible Notes being converted. The initial conversion rate is 187.6877 shares of the Company's common stock per $1,000 principal amount of 3.50% Series A Convertible Notes (which represents an initial conversion price of approximately $5.33 per share of the Company's common stock). The conversion rate, and thus the conversion price, is subject to adjustment as further described below.Holders of the 3.50% Series A Convertible Notes who convert their Notes in connection with a "make-whole fundamental change", as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a "fundamental change," as defined in the Indenture, holders of the 3.50% Series A Convertible Notes may require the Company to purchase all or a portion of their 3.50% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 3.50% Series A Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)12. Debt (Continued)In accordance with Accounting Standards Codification, or ASC 470-20,Debt with Conversion and Other Options, the Company separately accounts for the liability and equity conversion components of the 3.50% Series A Convertible Notes. The principal amount of the liability component of the 3.50% Series A Convertible Notes was $62.5 million as of the date of issuance based on the present value of its cash flows using a discount rate of 7%, our approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity conversion component was $7.9 million. In addition, the portion of the cash amount paid to the Participating Holders totaling $0.4 million was allocated to the debt discount with the remaining $47,000 to the equity component. The liability component is being accreted to the principal amount of the 3.50% Series A Convertible Notes using the effective interest method through the maturity in February 2018.The following table presents the carrying values of all Convertible Notes and notes issued pursuant to the Secured Loan (collectively, "Notes") as of June 30, 2016:(in thousands)Secured
Loan3.75%
Notes3.50%
Notes3.50%
Series A
NotesTOTAL Carrying amount of the equity conversion component
$ — $ 19,670 $ — $ 7,844 $ 27,514 Principal amount of the Convertible Notes
$ 68,250 $ 36,608 $ 44,654 $ 70,346 $ 219,858 Unamortized debt costs
(2,786 ) (26 ) (1,459 ) (4,271 ) Unamortized debt discount
(1,260 ) (182 ) — (3,733 ) (5,175 ) Net carrying amount
$ 64,204 $ 36,400 $ 43,195 $ 66,613 $ 210,412 As of June 30, 2016, the remaining period over which the unamortized debt discount of the 3.75% Convertible Notes will be amortized is 1 month using an effective interest rate of 10.9%; the remaining amortization period of the 3.50% Series A Convertible Notes is 19 months using an effective interest rate of 7.10%.A summary of interest expense on the Notes is as follows:Year ended June 30, (in thousands) 2016 2015 2014 Interest expense related to contractual interest coupon
$ 9,411 $ 7,774 $ 7,774 Interest expense related to amortization of debt discount
6,321 7,241 5,105 Interest expense related to amortization of debt issuance costs
1,728 1,503 1,408 $ 17,460 $ 16,518 $ 14,287 13.14. Employee BenefitPlansPlanThe
Company'sCompany’s employee savings and retirement plan is qualified under Section 401(k) of the United States Internal Revenue Code. Employees may make voluntary,tax-deferredtax‑deferred contributions to the 401(k) Plan up to the statutorily prescribed annual limit. The Company makes discretionaryAccuray IncorporatedNotes to Consolidated Financial Statements (Continued)13. Employee Benefit Plans (Continued)matching contributions to the 401(k) Plan on behalf of employees up to the limit determined by the Board of Directors. The Company contributed $2.1 million,
$2.3$2.2 million and$2.1$2.0 million to the 401(k) Plan during the years ended June 30,2016, 20152019, 2018 and2014,2017, respectively.14.Note 15. Defined Benefit Pension ObligationThe Company has established a defined pension plan for its employees in
theits Switzerland subsidiary. The plan provides benefits to employees upon retirement, death or disability. The Company uses June 30 as theyear-endyear‑end measurement date for this plan. The unfunded liability of$2.9$3.3 million was recognized inlong-termlong‑term other liabilities in the accompanying balance sheet as of June 30,2016.2019. Actuarial loss of$0.5$0.7 million was recognized in other comprehensive loss in fiscal2016.2019.116
The following table presents the funded status of the defined benefit pension
plan:June 30, (in thousands)2016 2015 Change in benefit obligation:
Benefit obligation—beginning of fiscal year
$ 8,861 $ 5,294 Service cost
1,903 980 Interest cost
76 107 Plan participants' contributions
2,239 3,010 Plan amendment
(490 ) — Actuarial loss
1,163 1,007 Foreign currency changes
(347 ) (210 ) Benefit and expense payments
(970 ) (1,327 ) Benefit obligation—end of fiscal year
$ 12,435 $ 8,861 Change in plan assets:
Plan assets—beginning of fiscal year
$ 7,184 $ 4,357 Employer contributions
1,226 1,166 Actual return on plan assets
176 152 Plan participants' contributions
2,239 3,010 Foreign currency changes
(283 ) (174 ) Benefit and expense payments
(970 ) (1,327 ) Plan assets—end of fiscal year
$ 9,572 $ 7,184 Funded status
$ (2,863 ) $ (1,677 ) Amounts recognized within the consolidated balance sheets:June 30, (in thousands)2016 2015 Assets
$ — $ — Long-term liabilities
2,863 1,677 Net amount recognized
$ 2,863 $ 1,677 Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)14. Defined Benefit Pension Obligation (Continued)plan (in thousands):June 30,
2019
2018
Change in benefit obligation:
Benefit obligation—beginning of fiscal year
$
14,254
$
13,979
Service cost
1,865
1,887
Interest cost
128
97
Plan participants’ contributions
1,818
1,878
Plan amendment
—
(108
)
Actuarial (gain)/loss
742
(935
)
Foreign currency changes
250
(470
)
Benefit and expense payments
(1,480
)
(2,074
)
Benefit obligation—end of fiscal year
$
17,577
$
14,254
Change in plan assets:
Plan assets—beginning of fiscal year
$
12,192
$
11,293
Employer contributions
1,373
1,347
Actual return on plan assets
122
141
Plan participants’ contributions
1,818
1,878
Foreign currency changes
203
(393
)
Benefit and expense payments
(1,480
)
(2,074
)
Plan assets—end of fiscal year
$
14,228
$
12,192
Funded status
$
(3,349
)
$
(2,062
)
Amounts recognized within the consolidated balance sheets:
Assets
$
—
$
—
Long-term other liabilities
(3,349
)
(2,062
)
Net amount recognized
$
(3,349
)
$
(2,062
)
The following table presents the amounts recognized in accumulated other comprehensive loss (before tax) for the defined benefit pension
plan:plan (in thousands):June 30, (in thousands)2016 2015 Net loss
$ 2,580 $ 1,517 Prior service (credit) cost
(514 ) — Accumulated other comprehensive loss
$ 2,066 $ 1,517 June 30,
2019
2018
Net loss
$
(144
)
$
(1,117
)
Prior service cost
(856
)
973
Accumulated other comprehensive loss
$
(1,000
)
$
(144
)
The following table presents the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
thosethis defined benefit pensionplansplan where accumulated benefit obligation exceeded the fair value of planassets:assets (in thousands):June 30,
June 30, 2019
2018
(in thousands)2016 2015 Projected benefit obligation
$ 12,435 $ 8,861 $
17,577
$
14,254
Accumulated benefit obligation
$ 9,572 $ 7,184 $
15,506
$
12,143
Fair value of plan assets
$ 9,572 $ 7,184 $
14,228
$
12,192
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Loss
117
The following table shows the components of the
Company'sCompany’s net periodic benefit costs and the other amounts recognized in other comprehensive(earnings)loss, before tax, related to theCompany'sCompany’s defined benefit pensionplan:Year ended June 30, (in thousands)2016 2015 2014 Net Periodic Benefit Costs:
Service cost
$ 1,903 $ 980 $ 734 Interest cost
76 107 60 Expected returns on assets
(102 ) (92 ) (61 ) Amortization of net (gain) loss
53 3 — $ 1,930 $ 998 $ 733 Other Amounts Recognized in Other Comprehensive Loss:
Net (gain) loss arising during the year
$ 1,093 $ 953 $ 567 Prior service cost (credit)
(491 ) — — Amortization of net (gain) loss
(53 ) (3 ) — $ 549 $ 950 $ 567 Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)14. Defined Benefit Pension Obligation (Continued)plan (in thousands):Year ended June 30,
2019
2018
2017
Net Periodic Benefit Costs:
Service cost
$
1,865
��
$
1,887
$
1,996
Interest cost
128
97
49
Expected returns on assets
(170
)
(156
)
(132
)
Amortization of prior service cost
(55
)
(44
)
(46
)
Amortization of net loss
—
11
114
Net periodic benefit costs
1,768
1,795
1,981
Other Amounts Recognized in Other Comprehensive Loss:
Net (gain) loss arising during the year
801
(901
)
(881
)
Prior service cost
—
(105
)
46
Amortization of prior service cost
55
44
—
Amortization of net gain
—
(11
)
(114
)
Total recognized in other comprehensive gain (loss)
856
(973
)
(949
)
Total recognized in net periodic benefit costs and other
comprehensive loss
$
2,624
$
822
$
1,032
The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during fiscal year
20172020 related to theCompany'sCompany’s defined benefit pensionplansplan are asfollows:(in thousands)2017 Net loss
$ 2,350 Prior service (credit) cost
(445 ) Accumulated other comprehensive loss
$ 1,905 Assumptionsfollows (in thousands):2020
Net loss
$
1,496
Prior service credit
(436
)
Accumulated other comprehensive loss
$
1,060
Assumptions
The assumptions used to determine net periodic benefit cost and to compute the expected
long-termlong‑term return on assets for theCompany'sCompany’s defined benefit pensionplansplan were as follows:Fiscal Years Fiscal Years
2016 2015 2014 2019
2018
2017
Net Periodic Benefit Costs:
Discount rate
0.4 % 0.9 % 2.0 % 0.45
%
0.90
%
0.70
%
Rate of compensation increase
2.0 % 2.0 % 2.0 % 1.50
%
1.50
%
2.00
%
Expected long-term return on assets
1.4 % 1.5 % 2.0 % 1.20
%
1.40
%
1.40
%
The assumptions used to measure the benefit obligation for the
Company'sCompany’s defined benefit pensionplansplan were as follows:Year ended June 30, June 30,
2016 2015 2014 2019
2018
Benefit Obligation:
Discount rate
1.4 % 1.5 % 2.0 % 0.45
%
0.90
%
Rate of compensation increase
2.0 % 2.0 % 2.0 % 1.50
%
1.50
%
118
Estimated Contributions and Future Benefit Payments
The Company made contributions of approximately
$1.2$1.4 million, $1.3 million and $1.3 million to the defined benefit pensionplansplan during fiscal years20162019, 2018 and2015,2017 respectively. The Company expects total contributions to the defined benefit pensionplansplan for fiscal year20172020 will be approximately$1.3$1.5 million.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)14. Defined Benefit Pension Obligation (Continued)Estimated future benefit payments to the defined benefit pension
plansplan at June 30,20162019 were asfollows:follows (in thousands):Year Ending June 30,
(in thousands)Future
Benefits2017
$ 982 2018
910 2019
844 2020
802 2021
760 Thereafter
3,991 Total
$ 8,289 Year Ending June 30,
Future
Benefits
2020
$
1,164
2021
1,080
2022
��
1,017
2023
970
2024
1,443
Thereafter
4,633
Total
$
10,307
Plan Assets
The plan assets are invested in insurance contracts with Swiss Life Foundation BVG (BVG) insurance company based in Zurich, Switzerland at the end of fiscal
2016year 2019 and20152018 and are expected to be invested 100% in insurance contracts in fiscal2017,2020, whichisare reinsured by Swiss Life Ltd (SLL). SLL invests the vested pension capital and provides a 100% capital and interest rate guarantee as negotiated by the Company. In2016,2019, the Company negotiated a guaranteed interest rate of1.25%1.00% for mandatory retirement savings and0.75%0.25% for supplementary retirement savings. The pension plan is entitled to an annual bonus from the SLL comprising the effective savings, risk and cost results. The technical administration and management of the savings account are guaranteed by the SLL on behalf of BVG. Insurance benefits due are paid directly to the entitled persons by the SLL in the name of and for the account of the collective foundation. The Company has committed itself to pay the annual contributions and costs due under the pension fund regulations.The contract of affiliation between the Company and BVG can be terminated by either side. In the event of a termination, recipients of retirement and
survivors'survivors’ benefits would remain with the collective foundation. The Company commits itself to transfer its active insured members and recipients of disability benefits to the new employee benefits institution, thus releasing BVG from all obligations.15.Note 16. Segment DisclosureThe Company has one operating and reporting segment (oncology systems group), which develops, manufactures and markets proprietary medical devices used in radiation therapy for the treatment of cancer patients. The
Company'sCompany’s Chief Executive Officer, its Chief Operating Decision Maker, reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Company does not assess the performance of its individual product lines on measures of profit or loss, or asset based metrics. Therefore, the information below is presented only for revenues andlong-livedlong‑lived tangible assets by geographic areas.119
Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)15. Segment Disclosure (Continued)Revenues attributed to a country or region is based on the shipping addresses of the
Company'sCompany’s customers. The following summarizes revenue by geographicregion:region (in thousands):Years ended June 30, (in thousands)2016 2015 2014 Americas
$ 159,517 $ 174,000 $ 156,242 Europe, Middle East, India and Africa
138,877 110,534 115,396 Asia (excluding Japan and India)
62,888 57,618 44,533 Japan
37,518 37,649 53,248 Total
$ 398,800 $ 379,801 $ 369,419 Years ended June 30,
2019
2018
2017
Americas
$
135,683
$
145,689
$
151,442
Europe, Middle East, India and Africa
149,095
120,032
104,026
Asia Pacific
63,793
72,925
59,278
Japan
70,214
66,251
68,668
Total
$
418,785
$
404,897
$
383,414
Information regarding geographic areas in which the Company has
long-livedlong‑lived tangible assets is asfollows:follows (in thousands):(in thousands)June 30,
2016June 30,
2015Americas
$ 23,842 $ 28,182 Europe, Middle East, India and Africa
551 929 Asia (excluding Japan and India)
1,342 455 Japan
2,143 2,263 Total
$ 27,878 $ 31,829 June 30,
2019
June 30,
2018
Americas
$
13,853
$
19,698
Europe, Middle East, India and Africa
575
569
Asia Pacific (excluding Japan and India)
1,419
1,635
Japan
1,275
1,796
Total
$
17,122
$
23,698
16.Note 17. Restructuring Charges
As part of the Company's plan to enhance operational performance through productivity initiatives,In October 2018, the Companyimplementedinformed affected employees of are-alignmentcost savings initiative designed to reduce operating costs through the elimination of approximately 5 percent of itsworkforce during the fourth quarter of fiscal year 2016. The re-alignment affected approximately 3% of the Company's totalglobal workforce.The Company incurred approximately $2.5 million, $1.4 million, and zero in restructuring charges in connection with its workforce re-alignment for the years ended June 30, 2016, 2015, and 2014.These restructuring chargesare includedof $1.5 million were recorded in cost of goods sold and operating expenses in the consolidated statements ofoperations. The Company had approximately $2.5operations, of which $1.0 million was paid during fiscal 2019 and$1.3$0.5 millioninis accruedrestructuring charges included in accrued compensationin the consolidated balancesheetssheet as of June 30,20162019.The Company incurred no restructuring charges for the years ended June 30, 2018 and
2015, respectively.Table of Contents2017.Accuray IncorporatedNotes to Consolidated Financial Statements (Continued)17.Note 18. Quarterly Financial Data (unaudited)The following table provides the selected quarterly financial data for fiscal
20162019 and2015:2018 (in thousands, except net income (loss) per share amounts:Quarters ended (in thousands, except per share amounts)September 30,
2015December 31,
2015March 31,
2016June 30,
2016Net revenue
$ 89,631 $ 108,912 $ 105,284 $ 94,973 Gross profit
$ 33,898 $ 42,571 $ 44,944 $ 37,300 Net income (loss)
$ (13,026 ) $ (6,027 ) $ 756 $ (7,207 ) Net income (loss) per share—basic
$ (0.16 ) $ (0.08 ) $ 0.01 $ (0.09 ) Net income (loss) per share—diluted
$ (0.16 ) $ (0.08 ) $ 0.01 $ (0.09 ) Shares used in basic per share calculation
79,760 80,346 80,860 81,081 Shares used in diluted per share calculation
79,760 80,346 82,071 81,081 Quarters ended
September 30, 2018
December 31, 2018
March 31,
2019
June 30,
2019
Net revenue
$
95,829
$
102,318
$
103,221
$
117,417
Gross profit
$
37,879
$
38,380
$
40,466
$
45,926
Net loss
$
(9,206
)
$
(4,640
)
$
(1,184
)
$
(1,400
)
Net loss per share—basic and diluted
$
(0.11
)
$
(0.05
)
$
(0.01
)
$
(0.02
)
Shares used in basic and diluted per share calculation
86,479
87,237
87,962
88,202
Quarters ended
Quarters ended September 30, 2017
December 31, 2017
March 31,
2018
June 30,
2018
(in thousands, except per share amounts)September 30,
2014December 31,
2014March 31,
2015June 30,
2015Net revenue
$ 82,381 $ 98,155 $ 97,515 $ 101,750 $
90,950
$
100,329
$
99,832
$
113,786
Gross profit
$ 27,801 $ 38,489 $ 38,660 $ 40,452 $
38,106
$
39,355
$
36,249
$
47,985
Net loss
$ (21,650 ) $ (9,992 ) $ (2,967 ) $ (5,600 ) Net income (loss)
$
(9,382
)
$
(4,719
)
$
(8,852
)
$
(946
)
Net loss per share—basic and diluted
$ (0.28 ) $ (0.13 ) $ (0.04 ) $ (0.07 ) $
(0.11
)
$
(0.06
)
$
(0.10
)
$
(0.01
)
Shares used in basic and diluted per share calculation
77,290 77,924 78,746 79,170 83,747
84,586
85,459
85,677
18. Subsequent Event3.75% Convertible Senior Notes120On August 1, 2016, the Company settled the remaining 3.75% Convertible Senior Notes for approximately $36.6 million aggregate principal amount and $0.7 million accrued interest for approximately $37.3 million in cash. In settling the notes for cash, during the January 2016 retirement as further described inNote 12 Debtand the August 2016 transaction, the Company avoided the issuance of approximately 10.6 million new common equity shares, representing a potential dilution of approximately 13 percent as of June 30, 2016.Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTSACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.
Item 9A. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule
13a-15(e)13a‑15(e) of the Exchange Act) as of June 30,2016.2019.Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by our Annual Report on Form
10-K,10‑K, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in theSEC'sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.(b)
Management’s Report on Internal Control over Financial Reporting
(b) Management's Report on Internal Control over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule
13a-15(f)13a‑15(f) of the Exchange Act. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the guidelines established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission("COSO"(“COSO”) 2013.Based on this evaluation, management concluded that our internal control over financial reporting was effective as of June 30,
2016, based upon the guidelines established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") 2013.2019.Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form
10-K10‑K and, as part of the audit, has issued a report, included in Item 8 of this Annual Report on Form10-K,10‑K, on the effectiveness of our internal control over financial reporting as of June 30,2016.2019.(c)
Changes in Internal Control over Financial Reporting
(c) Changes in Internal Control over Financial ReportingOur management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended June 30,
2016,2019, and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations of Internal Controls
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
None.
121
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and Stockholders
Accuray Incorporated
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Accuray Incorporated (a Delaware
Corporation)corporation) and subsidiaries (the"Company"“Company”) as of June 30,2016,2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO)(“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2019, and our report dated August 23, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The
Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement'sManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on theCompany'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and limitations of internal control over financial reporting
A
company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany'scompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended June 30, 2016, and our report dated August 24, 2016 expressed an unqualified opinion on those financial statements./s/ GRANT THORNTON LLP
San
Francisco,Jose, CaliforniaAugust
24, 2016Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers and Corporate Governance
The information in our
20162019 Proxy Statement regarding directors and executive officers appearing under the headings"Proposal“Proposal One—Election of Directors," "Executive Officers"” “Executive Officers” and"Section“Delinquent Section 16(a)Beneficial Ownership Reporting Compliance"Reports” is incorporated herein by reference.In addition, the information in our
20162019 Proxy Statement regarding the director nomination process, the Audit Committee financial expert and the identification of the Audit Committee members appearing under the heading"Corporate“Corporate Governance and Board of DirectorsMatters"Matters” is incorporated herein by reference.There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors.
Code of Conduct and Ethics
We have adopted a Code of Conduct and Ethics that applies to all employees including our principal executive officer and principal financial officer. The full texts of our codes of business conduct and ethics are posted on our website atwww.accuray.com
www.accuray.comunder the Investor Relations section. We intend to disclose future amendments to certain provisions of our codes, or waivers of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waiver. The inclusion of our web site address in this report does not include or incorporate by reference the information on our web site into this report.Item 11. EXECUTIVE COMPENSATION
The information in our
20162019 Proxy Statement appearing under the headings"Executive“Executive Compensation," "Compensation” “Compensation Committee Report," "Compensation” “Compensation Discussion and Analysis," "Compensation” “Compensation ofNon-Employee Directors"Non‑Employee Directors” and"Compensation“Corporate Governance and Board of Directors Matters—Compensation Committee Interlocks and InsiderInformation"Participation” is incorporated herein by reference.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information in our
20162019 Proxy Statement appearing under the heading"Security“Security Ownership of Certain Beneficial Owners andManagement"Management” and"Equity“Equity Compensation PlanInformation"Information” is incorporated herein by reference.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information in our
20162019 Proxy Statement appearing under the headings"Certain“Certain Relationships and RelatedParty Transactions"Transactions” and"Corporate Governance—“Corporate Governance and Board of Directors Matters—DirectorIndependence"Independence” is incorporated herein by reference.Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information in our
20162019 Proxy Statement appearing under the headings"Proposal Six—“Proposal Three—Ratification of Appointment of Independent Registered Public Accounting Firm—Audit andNon-Audit Services"Non‑Audit Services” and"Proposal Six—“Proposal Three—Ratification of Appointment of Independent Registered Public Accounting Firm—Audit CommitteePre-ApprovalPre‑Approval Policies andProcedures"Procedures” is incorporated herein by reference.123
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
We have filed the following documents as part of this report:
1.
Consolidated Financial Statements (as set forth in Item 8)
Page No.
Page No.Report of Independent Registered Public Accounting Firm
8480
Consolidated Balance Sheets
8581
Consolidated Statements of Operations and Comprehensive Loss
8682
Consolidated Statements of
Stockholders'Stockholders’ Equity8783
Consolidated Statements of Cash Flows
8884
Notes to Consolidated Financial Statements
8985
2.
Consolidated Financial Statement Schedules
The financial statement schedule of the Registrant and its subsidiaries for fiscal years
2016, 2015,2019, 2018, and20142017 is filed as a part of this report and should be read in conjunction with the Consolidated Financial Statements of the Registrant and its subsidiaries.All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Annual Report on Form
10-K.10‑K.124
The following exhibits are incorporated by reference or filed herewith.
Incorporated by Reference
Exhibit
No.
Exhibit Description
Filer
(ARAY/
TOMO)Form
File No.
Exhibit
Filing Date
Furnished
or Filed
Herewith3.1
Amended and Restated Certificate of Incorporation of Registrant.
ARAY
8‑K
001‑33301
3.1
02/06/2013
3.2
ARAY
8‑K
001‑33301
3.1
03/23/2015
4.1
ARAY
10‑Q
001‑33301
4.1
05/09/2013
4.2
ARAY
8‑K
001‑33301
4.1
04/25/2014
4.3
ARAY
8-K
001-33301
4.1
08/08/2017
4.4
ARAY
S‑1/A
333‑138622
4.3
02/05/2007
4.5
Form of 3.75% Convertible Senior Note due 2022 (included in Exhibit 4.3).
ARAY
8-K
001-33301
4.1
08/08/2017
4.6
ARAY
8-K
001-33301
4.1
12/04/2017
10.1
ARAY
S‑1
333‑138622
10.1
11/13/2006
10.2
Third Amendment to Industrial Complex Lease dated January 16, 2007.
ARAY
10‑K
001‑33301
10.1(a)
09/04/2007
10.3
ARAY
10‑Q
001‑33301
10.3
02/04/2010
10.4
ARAY
10‑Q
001‑33301
10.4
02/04/2010
10.5
ARAY
10‑Q
001‑33301
10.5
02/04/2010
125
Incorporated by Reference
Exhibit
No.
Exhibit Description
Filer
(ARAY/
TOMO)Form
File No.
Exhibit
Filing Date
Furnished
or Filed
HerewithARAY
8‑K
001‑33301
10.1
06/24/2014
10.7
ARAY
10‑Q
011‑33301
10.1
02/06/2015
10.8
Ninth Amendment to Lease by and between Google LLC and Accuray Incorporated, dated March 4, 2019.
ARAY
10‑Q
011‑33301
10.1
05/09/2019
10.9
Accuray Incorporated 1998 Equity Incentive Plan and forms of agreements relating thereto.
ARAY
S‑1
333‑138622
10.4
11/13/2006
10.10*
ARAY
10‑K
001‑33301
10.8
09/19/2011
10.11*
Form of Performance Stock Unit Grant Notice and Performance Stock Unit Agreement.
ARAY
8‑K
001‑33301
99.2
09/02/2014
10.12*
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement.
ARAY
8‑K
001‑33301
99.1
09/02/2014
10.13*
Form of Stock Option Grant Notice and Stock Option Agreement.
ARAY
8‑K
001‑33301
99.3
11/23/2011
10.14*
ARAY
8‑K
001‑33301
99.1
10/17/2012
10.15*
ARAY
DEF14A
001‑33301
Appendix A
10/04/2018
10.16*
ARAY
DEF14A
001‑33301
Appendix B
10/04/2018
10.17*
Accuray Incorporated Performance Bonus Plan, as amended on September 22, 2016.
ARAY
DEF14A
001‑33301
Appendix C
10/07/2016
10.18*
ARAY
10‑Q
001‑33301
10.6
11/06/2018
10.19*
ARAY
S-8
333-220698
99.1
09/28/2017
10.20*
Form of Accuray Incorporated Stand-Alone Inducement Restricted Stock Unit Agreement.
ARAY
S-8
333-224547
99.1
04/30/2018
10.21*
Form of Accuray Incorporated Stand-Alone Inducement Performance Unit Agreement.
ARAY
S-8
333-224547
99.2
04/30/2018
10.22*
Form of Accuray Incorporated Stand-Alone Inducement Stock Option Agreement.
ARAY
S-8
333-224547
99.3
04/30/2018
10.23*
ARAY
S‑8
333‑174952
99.1
06/17/2011
126
Incorporated by Reference
Exhibit
No.
Exhibit Description
Filer
(ARAY/
TOMO)Form
File No.
Exhibit
Filing Date
Furnished
or Filed
HerewithARAY
S‑8
333‑174952
99.2
06/17/2011
10.25*
ARAY
S‑8
333‑174952
99.3
06/17/2011
10.26*
ARAY
10‑Q
001‑33301
10.7
05/10/2011
10.27‡
ARAY
S‑1
333‑138622
10.18
11/13/2006
10.28‡
ARAY
S‑1
333‑138622
10.19
11/13/2006
10.29
TOMO
S‑1/A
333‑140600
10.11
04/16/2007
10.30*
ARAY
10‑Q
001‑33301
10.3
02/05/2018
10.31*
ARAY
10‑Q
001‑33301
10.7
02/05/2018
10.32*
Consulting Agreement by and between Alaleh Nouri and the Registrant, dated July 6, 2018.
ARAY
8-K
001-33301
10.1
07/06/2018
10.33*
ARAY
10‑Q
001‑33301
10.4
02/05/2018
10.34*
ARAY
10‑Q
001-33301
10.5
11/06/2018
10.35*
ARAY
10‑Q
001‑33301
10.6
02/05/2018
127
Incorporated by Reference
Exhibit
No.
Exhibit Description
Filer
(ARAY/
TOMO)Form
File No.
Exhibit
Filing Date
Furnished
or Filed
HerewithARAY
10‑Q
001‑33301
10.5
02/05/2018
10.37*
Offer Letter by and between Registrant and Shigeyuki Hamamatsu, dated August 14, 2018.
ARAY
10-Q
001-33301
10.4
11/06/2018
10.38*
ARAY
10-Q
001-33301
10.1
02/08/2019
10.39*
Change in Control Agreement between Registrant and Shigeyuki Hamamatsu, dated September 21, 2017.
ARAY
10-Q
001-33301
10.4
11/03/2017
10.40*
Executive Employment Agreement by and Between Registrant and Patrick Spine, dated June 30, 2018.
ARAY
10-Q
001-33301
10.2
02/08/2019
10.41*
Executive Employment Agreement by and Between Registrant and Jesse Chew, dated October 17, 2018.
ARAY
10-Q
001-33301
10.3
02/08/2019
10.42‡
ARAY
10-K
001-33301
10.37
08/25/2017
10.43
ARAY
8-K
001-33301
10.1
07/28/2017
10.44
Form of Subscription Agreement between Registrant and each signatory thereto, dated July 27, 2017.
ARAY
8-K
001-33301
10.2
07/28/2017
10.45‡
ARAY
10-Q
001-33301
10.1
02/05/2018
128
Incorporated by Reference
Exhibit
No.
Exhibit Description
Filer
(ARAY/
TOMO)Form
File No.
Exhibit
Filing Date
Furnished
or Filed
HerewithARAY
10-Q
001-33301
10.2
02/05/2018
10.47‡
ARAY
10-K
001-33301
10.47
08/24/2018
10.48‡
ARAY
10-K
001-33301
10.48
08/24/2018
10.49
ARAY
10-Q
001-33301
10.6
02/08/2019
10.50
ARAY
10-Q
001-33301
10.7
02/08/2019
129
Incorporated by Reference
Exhibit
No.
Exhibit Description
Filer
(ARAY/
TOMO)Form
File No.
Exhibit
Filing Date
Furnished
or Filed
HerewithX
10. 52†
X
10.53*
X
21.1
X
23.1
Consent of Grant Thornton LLP, independent registered public accounting firm.
X
24.1
X
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
X
31.2
X
32.1
X
101.INS
XBRL Instance Document
X
101.SCH
XBRL Taxonomy Extension Schema Document
X
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
X
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
X
*
Management contract or compensatory plan or arrangement.
130
Incorporated by Reference Exhibit No. Exhibit Description Filer
(ARAY/
TOMO)Form File No. Exhibit Filing Date Furnished
or Filed
Herewith2.1 Agreement and Plan of Merger of Accuray Incorporated, a Delaware Corporation, and Accuray Incorporated, a California Corporation, dated as of February 3, 2007. ARAY S-1/A 333-138622 2.1 02/07/2007 2.2 Agreement and Plan of Merger, by and among Registrant, Jaguar Acquisition, Inc. and TomoTherapy Incorporated dated March 6, 2011. ARAY 8-K 001-33301 2.1 03/07/2011 3.1 Amended and Restated Certificate of Incorporation of Registrant. ARAY 8-K 001-33301 3.1 02/06/2013 3.2 Amended and Restated Bylaws of Registrant. ARAY 8-K 001-33301 3.1 03/23/2016 4.1 Indenture by and between Registrant and the Bank of New York Mellon Trust Company, N.A., dated as of August 1, 2011. ARAY 10-Q 001-33301 10.1 11/08/2011 †
Certain portions of this exhibit have been omitted because they are both not material and would be competitively harmful if publicly disclosed.
Incorporated by Reference Exhibit No. Exhibit Description Filer
(ARAY/
TOMO)Form File No. Exhibit Filing Date Furnished
or Filed
Herewith4.2 Indenture by and between Registrant and the Bank of New York Mellon Trust Company, N.A., dated as of February 13, 2013. ARAY 10-Q 001-33301 4.1 05/09/2013 4.3 Investors' Rights Agreement by and between Registrant and purchasers of Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock and certain holders of common stock, dated October 30, 2006. ARAY S-1 333-138622 4.2 11/13/2006 4.4 Form of Common Stock Certificate. ARAY S-1/A 333-138622 4.3 02/05/2007 4.5 Indenture by and between Registrant and the Bank of New York Mellon Trust Company, N.A., dated as of April 24, 2014. ARAY 8-K 001-33301 4.1 04/25/2014 10.1 Industrial Complex Lease by and between Registrant and MP Caribbean, Inc., dated July 14, 2003, as amended by the First Amendment to Industrial Complex Lease effective as of December 9, 2004 and the Second Amendment to Industrial Complex Lease effective as of September 25, 2006. ARAY S-1 333-138622 10.1 11/13/2006 10.2 Third Amendment to Industrial Complex Lease dated January 16, 2007. ARAY 10-K 001-33301 10.1 (a) 09/04/2007 10.3 Fourth Amendment to Industrial Complex Lease by and between the Registrant and BRCP Caribbean Portfolio, LLC, dated September 18, 2007. ARAY 10-Q 001-33301 10.3 02/04/2010 10.4 Fifth Amendment to Industrial Complex Lease by and between the Registrant and BRCP Caribbean Portfolio, LLC, dated April 1, 2008. ARAY 10-Q 001-33301 10.4 02/04/2010 10.5 Sixth Amendment to Industrial Complex Lease by and between the Registrant and I & G Caribbean, Inc., dated December 18, 2009. ARAY 10-Q 001-33301 10.5 02/04/2010 10.6 Seventh Amendment to Lease by and between the Registrant and DWF III Caribbean, LLC, dated June 20, 2014. ARAY 8-K 001-33301 10.1 06/24/2014 Incorporated by Reference Exhibit No. Exhibit Description Filer
(ARAY/
TOMO)Form File No. Exhibit Filing Date Furnished
or Filed
Herewith10.7 Standard Industrial Lease by and between Registrant and The Realty Associates Fund III, L.P., effective as of June 30, 2005. ARAY S-1 333-138622 10.2 11/13/2006 10.8 * Accuray Incorporated 1993 Stock Option Plan and forms of agreements relating thereto. ARAY S-1 333-138622 10.3 11/13/2006 10.9 * Accuray Incorporated 1998 Equity Incentive Plan and forms of agreements relating thereto. ARAY S-1 333-138622 10.4 11/13/2006 10.10 * Accuray Incorporated 2007 Incentive Award Plan. ARAY 10-K 001-33301 10.8 09/19/2011 10.11 * Form of Performance Stock Unit Grant Notice and Performance Stock Unit Agreement. ARAY 8-K 001-33301 99.2 09/02/2014 10.12 * Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement. ARAY 8-K 001-33301 99.1 09/02/2014 10.13 * Form of Stock Option Grant Notice and Stock Option Agreement. ARAY 8-K 001-33301 99.3 11/23/2011 10.14 * Accuray Incorporated 2007 Employee Stock Purchase Plan, as amended. ARAY 10-Q 001-33301 10.2 05/07/2014 10.15 * Form of Market Stock Unit Grant Notice and Award Agreement. ARAY 8-K 001-33301 99.1 10/17/2012 10.16 * Form of 2014 Market Stock Unit Grant Notice and Award Agreement ARAY 8-K 001-33301 99.1 09/27/2013 10.17 * Form of 2015 Market Stock Unit Grant Notice and Award Agreement ARAY 8-K 001-33301 99.3 09/02/2014 10.18 * Form of 2016 Market Stock Unit Grant Notice and Award Agreement ARAY 8-K 001-33301 99.1 10/02/2015 10.19 * Form of Indemnification Agreement by and between Registrant and each of its directors and executive officers. ARAY 10-Q 001-33301 10.7 05/10/2011 10.20 ‡ Nonexclusive End-User Software License Agreement by and between Registrant and The Regents of the University of California, dated September 9, 2005. ARAY S-1 333-138622 10.18 11/13/2006 Incorporated by Reference Exhibit No. Exhibit Description Filer
(ARAY/
TOMO)Form File No. Exhibit Filing Date Furnished
or Filed
Herewith10.21 ‡ License Agreement by and between Registrant and The Board of Trustees of the Leland Stanford Junior University, effective as of July 9, 1997. ARAY S-1 333-138622 10.19 11/13/2006 10.22 * Accuray Incorporated Performance Bonus Plan, as amended on September 29, 2015. ARAY 10-Q 001-33301 10.5 11/05/2015 10.23 Lease Agreement by and between TomoTherapy Incorporated and Old Sauk Trails Park Limited Partnership, dated January 26, 2005. TOMO S-1 333-140600 10.13 02/12/2007 10.24 Lease Agreement, dated October 28, 2005, between TomoTherapy Incorporated and Adelphia, LLC. TOMO S-1 333-140600 10.14 02/12/2007 10.25 TomoTherapy Incorporated 2000 Stock Option Plan, as amended, and forms of option agreements thereunder. ARAY S-8 333-174952 99.1 06/17/2011 10.26 TomoTherapy Incorporated 2002 Stock Option Plan, as amended, and forms of option agreements thereunder. ARAY S-8 333-174952 99.2 06/17/2011 10.27 TomoTherapy Incorporated 2007 Equity Incentive Plan, as amended, and forms of option agreements thereunder. ARAY S-8 333-174952 99.3 06/17/2011 10.28 Development and OEM Supply Agreement by and between TomoTherapy Incorporated and Analogic Corporation, dated January 27, 2003. TOMO S-1/A 333-140600 10.11 04/16/2007 10.29 License Agreement 98-0228, dated February 22, 1999, between TomoTherapy Incorporated and Wisconsin Alumni Research Foundation. TOMO S-1/A 333-140600 10.4 04/19/2007 10.30 Amendment to License Agreement 90-0228, between TomoTherapy Incorporated and Wisconsin Alumni Research Foundation, dated April 16, 2007. TOMO S-1 333-146219 10.31 09/21/2007 Incorporated by Reference Exhibit No. Exhibit Description Filer
(ARAY/
TOMO)Form File No. Exhibit Filing Date Furnished
or Filed
Herewith10.31 Amendment to License Agreement 90-0228 between TomoTherapy Incorporated and Wisconsin Alumni Research Foundation, dated December 16, 2008. TOMO 8-K 001-33452 10.2 12/30/2008 10.32 Amendment to Lease between Registrant and OAW Orleans 1310, LLC, as successor to The Realty Associates Fund III, L.P., dated April 12, 2011. ARAY 10-K 001-33301 10.54 09/19/2012 10.33 * Renewal Executive Employment Agreement by and between the Registrant and Joshua H. Levine, dated January 1, 2015. ARAY 10-Q 001-33301 10.1 05/07/2015 10.34 * Renewal Executive Employment Agreement by and between the Registrant and Gregory Lichtwardt, dated January 1, 2015. ARAY 10-Q 001-33301 10.2 05/07/2015 10.35 * Renewal Executive Employment Agreement by and between the Registrant and Kelly Londy, dated January 1, 2015. ARAY 10-Q 001-33301 10.3 05/07/2015 10.36 Renewal Executive Employment Agreement by and between the Registrant and Alaleh Nouri, dated January 1, 2015. ARAY 10-Q 001-33301 10.4 05/07/2015 10.37 * Executive Employment Agreement by and between Registrant and Kevin Waters, dated September 15, 2015 ARAY 8-K 001-33301 10.1 09/15/2015 10.30 * 10.38 * Separation Agreement and General Release by and between the Registrant and Gregory Lichtwardt, dated September 15, 2015 ARAY 10-Q 001-33301 10.2 11/05/2015 10.31 * 10.39 * Agreement for Consulting Services by and between Registrant and Gregory Lichtwardt, dated September 15, 2015 ARAY 10-Q 001-33301 10.3 11/05/2015 10.32 * 10.40 * Amended and Restated Executive Employment Agreement by and between Registrant and Kelly Londy, dated October 15, 2015 ARAY 8-K 001-33301 10.1 10/15/2015 10.33 * Incorporated by Reference Exhibit No. Exhibit Description Filer
(ARAY/
TOMO)Form File No. Exhibit Filing Date Furnished
or Filed
Herewith10.41 ‡ Financing Agreement by and among Registrant, certain subsidiaries of the Registrant, the lenders from time to time party thereto, and Cerberus Business Finance, LLC, as collateral agent and administrative agent for the lenders dated January 11, 2016 ARAY 10-Q 001-33301 10.1 04/29/2016 10.34 ‡ 10.42 Eighth Amendment to Lease by and between the Registrant and DWF III Caribbean, LLC, dated October 31, 2014. ARAY 10-Q 011-33301 10.1 02/06/2015 10.43 Form of Note Exchange Agreement. ARAY 8-K 001-33301 10.1 04/18/2014 21.1 List of subsidiaries. X 23.1 Consent of Grant Thornton LLP, independent registered public accounting firm. X 24.1 Power of Attorney (incorporated by reference to the signature page of this annual report on Form 10-K). X 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form
10-K10‑K is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Accuray Incorporated under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form10-K,10‑K, irrespective of any general incorporation language contained in such filing. Form10-K,10‑K, irrespective of any general incorporation language contained in such filing.None.
131
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned,undersigned; thereunto duly authorized, in the City of Sunnyvale, State of California, on the24th23rd day of August2016.2019.ACCURAY INCORPORATED
ACCURAY INCORPORATEDBy:
By:/s/
JOSHUA H. LEVINE
Joshua H. LevineJoshua H. Levine
President and Chief Executive OfficerBy:
By:/s/
KEVIN M. WATERS
Shig HamamatsuShig Hamamatsu
Kevin M. Waters
Senior Vice President and Chief Financial OfficerKNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Joshua H. Levine and
Kevin M. Waters,Shig Hamamatsu, and each of them, as his true and lawfulattorneys-in-factattorneys‑in‑fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form10-K,10‑K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-factattorneys‑in‑fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that saidattorneys- in-attorneys‑ in‑ fact and agents, and any of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following and on the dates indicated.
Signature
Title
SignatureTitleDate
/s/
JOSHUA H. LEVINE
Joshua H. LevineJoshua H. Levine
President and Chief Executive Officer and Director
(principal executive officer)(Principal Executive Officer)August
24, 201623, 2019/s/
KEVIN M. WATERS
Shig HamamatsuKevin M. WatersShig Hamamatsu
Senior Vice President andChief Financial Officer
(Principal Financial Officer)(principal financial and accounting officer)August
23, 201924, 2016/s/
LOUISLouis J.LAVIGNE, JR.
LavigneLouis J. Lavigne, Jr.
Chairperson of the Board and Director
August
24, 2016Table of Contents23, 2019SignatureTitleDate/s/
ELIZABETH DÁVILA
Elizabeth DávilaElizabeth Dávila
Vice Chairperson of the Board andDirector
August
24, 201623, 2019
Jack Goldstein, Ph.D.Jack Goldstein, Ph.D.
Director
August
23, 201924, 2016/s/
RICHARD R. PETTINGILL
Beverly A. HussBeverly A. Huss
Director
August 23, 2019
/s/ Richard R. Pettingill
Richard R. Pettingill
Director
August
23, 201924, 2016/s/ EMAD RIZK, M.D.Emad Rizk, M.D.DirectorAugust 24, 2016/s/
ROBERT S. WEISS
Robert S. WeissRobert S. Weiss
Director
August
23, 201924, 2016/s/
DENNIS WINGER
Joseph E. WhittersDennis WingerJoseph E. Whitters
Director
August
23, 201924, 2016132