Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2016

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission File Number: 001-33301

 

ACCURAY INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

20-8370041

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification Number)

 

1310 Chesapeake Terrace

Sunnyvale, California 94089

(Address of Principal Executive Offices Including Zip Code)

 

(408) 716-4600

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

 

As of January 20, 2017, there were 82,897,307 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 



Table of Contents

 

Accuray Incorporated

 

Form 10-Q for the Quarter Ended December 31, 2016

 

Table of Contents

 

 

 

Page No.

 

 

 

PART I.

Financial Information

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements:

3

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2016

3

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended December 31, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and 2015

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3.

Defaults Upon Senior Securities

35

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

Item 5.

Other Information

35

 

 

 

Item 6.

Exhibits

36

 

 

 

Signatures

 

37

 

We own or have rights to various trademarks and trade names used in our business in the United States or other countries, including the following: Accuray®, Accuray Logo®, CyberKnife®, Hi-Art®, RayStation®, RoboCouch®, Synchrony®, TomoTherapy®, Xsight®, Accuray Precision™ Treatment Planning System, CTrue™, H™ Series, iDMS™, InCise™, Iris™, M6™ Series, OIS Connect™, PlanTouch™, QuickPlan™, TomoDirect™, TomoEdge™, TomoH™, TomoHD™, TomoHDA™, TomoHelical™, Tomo Quality Assurance™, Radixact™, StatRT™, and VoLO™. ImagingRing® is a registered trademark belonging to medPhoton GmbH. RayStation® is a registered trademark belonging to RaySearch Laboratories, AB.

 

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PART I.         FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

 

Accuray Incorporated

Condensed Consolidated Balance Sheets

(in thousands, except share amounts and par value)

(Unaudited)

 

 

 

December 31,

 

June 30,

 

 

 

2016

 

2016 (1)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

69,472

 

$

119,771

 

Short-term investments

 

38,908

 

47,239

 

Restricted cash

 

470

 

891

 

Accounts receivable, net of allowance for doubtful accounts of $763 and $826 as of December 31, 2016 and June 30, 2016, respectively

 

71,673

 

56,810

 

Inventories

 

116,902

 

115,987

 

Prepaid expenses and other current assets

 

14,516

 

16,098

 

Deferred cost of revenue

 

4,782

 

4,884

 

Total current assets

 

316,723

 

361,680

 

Property and equipment, net

 

24,967

 

27,878

 

Goodwill

 

57,712

 

57,848

 

Intangible assets, net

 

3,634

 

7,611

 

Deferred cost of revenue

 

610

 

1,996

 

Other assets

 

11,517

 

12,020

 

Total assets

 

$

415,163

 

$

469,033

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

25,154

 

$

15,229

 

Accrued compensation

 

18,623

 

18,725

 

Other accrued liabilities

 

16,788

 

22,184

 

Short-term debt

 

3,500

 

39,900

 

Customer advances

 

24,716

 

22,123

 

Deferred revenue

 

91,032

 

92,051

 

Total current liabilities

 

179,813

 

210,212

 

Long-term liabilities:

 

 

 

 

 

Long-term other liabilities

 

10,532

 

10,984

 

Deferred revenue

 

11,497

 

17,665

 

Long-term debt

 

166,668

 

170,512

 

Total liabilities

 

368,510

 

409,373

 

Commitments and contingencies (Note 6)

 

 

 

 

 

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 December 31, 2016 and June 30, 2016, respectively; issued and outstanding: 82,894,723 and 81,378,208 shares at December 31, 2016 and June 30, 2016, respectively

 

83

 

81

 

Additional paid-in-capital

 

488,908

 

481,346

 

Accumulated other comprehensive loss

 

(2,236

)

(960

)

Accumulated deficit

 

(440,102

)

(420,807

)

Total stockholders’ equity

 

46,653

 

59,660

 

Total liabilities and stockholders’ equity

 

$

415,163

 

$

469,033

 

 


(1)         The condensed consolidated balance sheet at June 30, 2016 has been derived from audited consolidated financial statements.

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Accuray Incorporated

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

35,398

 

$

55,759

 

$

70,997

 

$

95,754

 

Services

 

52,104

 

53,153

 

103,011

 

102,789

 

Total net revenue

 

87,502

 

108,912

 

174,008

 

198,543

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

Cost of products

 

22,969

 

32,717

 

46,321

 

55,734

 

Cost of services

 

33,146

 

33,624

 

64,956

 

66,340

 

Total cost of revenue

 

56,115

 

66,341

 

111,277

 

122,074

 

Gross profit

 

31,387

 

42,571

 

62,731

 

76,469

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

11,944

 

14,931

 

24,173

 

29,227

 

Selling and marketing

 

13,904

 

15,076

 

28,222

 

28,493

 

General and administrative

 

10,362

 

12,688

 

21,706

 

26,104

 

Total operating expenses

 

36,210

 

42,695

 

74,101

 

83,824

 

Loss from operations

 

(4,823

)

(124

)

(11,370

)

(7,355

)

Other expense, net

 

(4,120

)

(5,070

)

(8,125

)

(10,161

)

Loss before provision for income taxes

 

(8,943

)

(5,194

)

(19,495

)

(17,516

)

Provision for (benefit from) income taxes

 

426

 

833

 

(200

)

1,537

 

Net loss

 

$

(9,369

)

$

(6,027

)

$

(19,295

)

$

(19,053

)

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.11

)

$

(0.08

)

$

(0.24

)

$

(0.24

)

Weighted average common shares used in computing loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

82,328

 

80,346

 

81,952

 

80,053

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,369

)

$

(6,027

)

$

(19,295

)

$

(19,053

)

Foreign currency translation adjustment

 

(1,325

)

(469

)

(1,206

)

(727

)

Unrealized loss on investments, net of tax

 

(68

)

(128

)

(70

)

(90

)

Comprehensive loss

 

$

(10,762

)

$

(6,624

)

$

(20,571

)

$

(19,870

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Accuray Incorporated

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(19,295

)

$

(19,053

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

9,280

 

9,061

 

Share-based compensation

 

6,387

 

5,879

 

Amortization of debt issuance costs

 

782

 

771

 

Amortization and accretion of discount and premium on investments

 

63

 

536

 

Accretion of interest on debt

 

1,456

 

3,870

 

(Recovery of) provision for bad debt, net

 

(63

)

128

 

Provision for write-down of inventories

 

665

 

729

 

Loss on disposal of property and equipment

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

Restricted cash

 

421

 

950

 

Accounts receivable

 

(15,848

)

10,959

 

Inventories

 

(2,559

)

(5,669

)

Prepaid expenses and other assets

 

1,425

 

(3,546

)

Deferred cost of revenue

 

1,471

 

(2,678

)

Accounts payable

 

10,070

 

6,715

 

Accrued liabilities

 

(3,446

)

5,414

 

Customer advances

 

3,119

 

294

 

Deferred revenues

 

(5,317

)

5,912

 

Net cash (used in) provided by operating activities

 

(11,389

)

20,280

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment, net

 

(3,136

)

(4,125

)

Purchases of investments

 

(14,992

)

(33,130

)

Sales and maturities of investments

 

23,190

 

29,505

 

Net cash provided by (used in) investing activities

 

5,062

 

(7,750

)

Cash flows from financing activities

 

 

 

 

 

Proceeds from employee stock plans

 

2,050

 

2,055

 

Taxes paid related to net share settlement of equity awards

 

(737

)

(2,841

)

Payments made to note and loan holders

 

(42,483

)

 

Net cash used in financing activities

 

(41,170

)

(786

)

Effect of exchange rate changes on cash and cash equivalents

 

(2,802

)

(2,844

)

Net increase (decrease) in cash and cash equivalents

 

(50,299

)

8,900

 

Cash and cash equivalents at beginning of period

 

119,771

 

79,551

 

Cash and cash equivalents at end of period

 

$

69,472

 

$

88,451

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Accuray Incorporated

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1. Summary of Significant Accounting Policies

 

Description of Business

 

Accuray Incorporated (together with its subsidiaries, the “Company” or “Accuray”) is incorporated in Delaware and has its principal place of business in Sunnyvale, California. The Company designs, develops and sells advanced radiosurgery and radiation therapy systems for the treatment of tumors throughout the body. The Company has offices in the United States, Switzerland, China, Hong Kong and Japan and conducts its business worldwide.

 

Basis of Presentation and Principles of Consolidation

 

The condensed 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.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP), pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and note disclosures have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the periods presented. The results for the three and six months ended December 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2017, or for any other future interim period or fiscal year.

 

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended June 30, 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 24, 2016. The Company’s significant accounting policies are described in Note 2 to those audited consolidated financial statements and there have been no subsequent material changes to such policies.

 

Recent Accounting Standard Update Not Yet Effective

 

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which provides amendments to current guidance to address the classification and presentation of changes in restricted cash in the statement of cash flows. This ASU will be effective for the Company in the first quarter of its fiscal year 2019 and early adoption is permitted. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of these standards on its condensed consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU will be effective for the Company in the first quarter of its fiscal year 2019 and early adoption is permitted. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standards on its condensed consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13 (ASU 2016-13) Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. This ASU will be effective for the Company in the first quarter of its fiscal year 2021 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of the Company’s fiscal year 2020. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718). The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU will be effective for the Company in the first quarter of its fiscal year 2018 and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

 

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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). 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 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. This ASU will be effective for the Company in the first quarter of its fiscal year 2020 and early adoption is permitted. The ASU requires adoption based upon a modified retrospective transition approach. Company has not yet selected a transition method, has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its condensed 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 Financial Liabilities. ASU 2016-01 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. This ASU will be effective for the Company in the first quarter of its fiscal year 2019 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted for certain provisions. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues 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 a five 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 existing 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 additional disclosures. In August 2015, the FASB approved a one year deferral of the effective period of ASU 2014-09. The standard will be effective for the Company in the first quarter of its fiscal year 2019, but early adoption is permitted starting in the first quarter of fiscal year 2018. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in 2016 and 2017. Preliminarily, the Company intends to adopt the new standard in the first quarter of fiscal year 2019 using the retrospective approach noted in (ii) above. The Company is currently evaluating the impact of the adoption of this standard on its condensed consolidated financial statements and related disclosures. While the Company’s assessment is ongoing, it believes that the most significant impacts are related to the recognition of revenues for system sales and the potential deferral of sales commissions over a longer period. Due to the complexity of certain of the Company’s customer contracts, the actual revenue recognition treatment required under the new standard for these arrangements may be dependent on contract-specific terms and vary in some instances.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures at the date of the financial statements. Key estimates and assumptions made by the Company relate to revenue recognition, assessment of recoverability of goodwill and intangible assets, valuation of inventories, share-based compensation expense, income taxes, allowance for doubtful accounts, loss contingencies and corporate bonus expenses. Actual results could differ materially from those estimates.

 

Concentration of Credit and Other Risks

 

The Company’s cash, cash equivalents and investments are 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 does not believe that it is exposed to any significant risk of loss on these balances.

 

For the three months ended December 31, 2016 and 2015, respectively, there were no customers that represented 10% or more of total net revenue. For the six months ended December 31, 2016 and 2015, there were no customers that represented more than 10% and one customer that represented 11% of total net revenue, respectively. One customer accounted for 20% and 18% of the Company’s total accounts receivable as of December 31, 2016 and Jun e 30, 2016, respectively.

 

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 pursuant to which the accounts receivable are generated. Accounts receivable balances are charged against the allowance for doubtful accounts once collection efforts are unsuccessful.

 

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Single 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 at comparable prices for these components subject to any regulatory qualifications, if required.

 

Revenue Recognition

 

The Company earns revenue from the sale of products and related services. The Company records revenues net of any value added or sales tax. For arrangements with multiple elements, the Company allocates arrangement fees to products and services based upon Vendor Specific Objective Evidence (VSOE) of fair value of the respective elements, Third-Party Evidence (TPE), or Best Estimate of Selling Price (BESP), using the relative selling price method.

 

Product and Service Revenue

 

The 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, revenue is recognized upon delivery, assuming all other revenue recognition criteria are met.

 

The Company offers systems with post-contract customer support (PCS), installation services, training and professional services. PCS includes planned and corrective maintenance services, software updates, bug fixes, as well as call-center support. Service revenue is generated primarily from PCS (warranty period services and post warranty services), installation services, training, parts and upgrades that are sold under service contracts and professional services. PCS revenue is deferred and recognized over the service period. Installation service revenue is recognized concurrently with system revenue. Training and professional service revenues that are not deemed essential to the functionality of the systems are recognized as such services are performed.

 

Costs associated with service revenue are expensed when incurred, except when those costs are related to parts or system upgrades where revenue recognition has been deferred. In those cases, the costs are deferred and recognized over the period of revenue recognition.

 

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 period.

 

A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss used to compute basic and diluted loss per share

 

$

(9,369

)

$

(6,027

)

$

(19,295

)

$

(19,053

)

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic and diluted loss per share

 

82,328

 

80,346

 

81,952

 

80,053

 

 

The potentially dilutive shares of the Company’s common stock resulting from the assumed exercise of outstanding stock options, the vesting of Restricted Stock Units (RSU), Market Stock Units (MSU) and Performance Stock Units (PSU), and the purchase of shares under the 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 been anti-dilutive. Additionally, the 3.50% Convertible Senior Notes due February 1, 2018 (the “3.50% Convertible Notes”), the 3.50% Series A Convertible Notes (the “3.50% Series A Convertible Notes”) due February 1, 2018 (together, the “Convertible Notes”) and the 3.75% Convertible Senior Notes (the “3.75% Convertible Notes”) are included in the calculation of diluted net income per share only if their inclusion is dilutive. 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 (in thousands):

 

 

 

As of December 31,

 

 

 

2016

 

2015

 

Stock options

 

2,850

 

2,409

 

RSUs, PSUs and MSUs

 

5,622

 

4,834

 

3.50% Convertible Notes

 

8,378

 

8,378

 

3.50% Series A Convertible Notes

 

 

2,781

 

 

 

16,850

 

18,402

 

 

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Table of Contents

 

Outstanding Convertible Notes—Diluted Share Impact

 

The 3.50% Series A Convertible Notes have an optional physical (share), cash or combination settlement feature and contain certain conditional conversion features. Due to the optional cash settlement feature and management’s intent to settle the principal amount thereof in cash, the conversion shares underlying the outstanding principal amount of the 3.50% Series A Convertible Notes, totaling approximately 13.2 million shares were not included in the potentially diluted share count table above. The zero potentially dilutive shares of the 3.50% Series A Convertible Notes as of December 31, 2016, included in the table above are the result of the lower average share price, which was below the conversion price and management’s intent to settle the principal amount thereof in cash. 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.

 

The 3.75% Convertible Notes were fully settled in cash during January and August of 2016 as further discussed in Note 8. As of December 31, 2015, approximately 10.6 million shares related to the 3.75% Convertible Notes were excluded from the potentially dilutive share count table above due to the optional cash settlement feature and management’s intent to settle the principal amount thereof in cash. In addition, there were no premium shares associated with the 3.75% Convertible Notes as the Company’s average share price did not exceed the conversion price as of December 31, 2015.

 

Segment Information

 

The Company has one operating and reporting segment (oncology systems group), which develops, manufactures and markets proprietary medical devices used in radiation therapy and radiosurgery for the treatment of cancer patients. The Company’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 and long-lived tangible assets by geographic areas. Revenue by geographic region is based on the shipping addresses of the Company’s customers. The following summarizes revenue by geographic region (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Americas

 

$

39,183

 

$

51,000

 

$

79,825

 

$

96,290

 

Europe, Middle East, India and Africa

 

25,638

 

35,784

 

46,920

 

58,818

 

Asia-Pacific

 

8,347

 

15,739

 

21,572

 

32,721

 

Japan

 

14,334

 

6,389

 

25,691

 

10,714

 

Total

 

$

87,502

 

$

108,912

 

$

174,008

 

$

198,543

 

 

Information regarding geographic areas in which the Company has long lived tangible assets is as follows (in thousands):

 

 

 

December 31,

 

June 30,

 

 

 

2016

 

2016

 

Americas

 

$

20,958

 

$

23,842

 

Europe, Middle East, India and Africa

 

669

 

551

 

Asia-Pacific

 

1,773

 

1,342

 

Japan

 

1,567

 

2,143

 

Total

 

$

24,967

 

$

27,878

 

 

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Table of Contents

 

2. Balance Sheet Components

 

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’s balance sheet. The Company’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year and capital leases, totaled $6.0 million and $7.6 million at December 31, 2016 and June 30, 2016, respectively, and are included in Other Assets in the condensed consolidated balance sheets. Of the $6.0 million in financing receivables at December 31, 2016, $3.2 million is related to sales-type leases with customers while the remaining $2.8 million is related to contractual maturities of more than one year. Of the $7.6 million in financing receivables at June 30, 2016, $3.5 million is related to sales-type leases with customers while the remaining $4.1 million is related to contractual maturities of more than one year. 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 at lease 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 term of the lease and 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 significant near-term risk of non-payments. As of December 31, 2016, the sales-type lease portion of the financing receivables was rated at a moderate risk. The Company performed an assessment of the allowance for credit losses related to its financing receivables as of December 31, 2016 and June 30, 2016. Based upon such assessment, the Company did not record an allowance for credit losses related to such financing receivables as of December 31, 2016 and June 30, 2016, respectively.

 

A summary of the Company’s financing receivables is presented as follows (in thousands):

 

 

 

 

 

Financed

 

 

 

 

 

Lease

 

Service Contracts

 

 

 

December 31, 2016

 

Receivables

 

and Other

 

Total

 

Gross

 

$

4,417

 

$

4,931

 

$

9,348

 

Residual value

 

 

 

 

Unearned income

 

(515

)

 

(515

)

Allowance for credit loss

 

 

 

 

Total, net

 

$

3,902

 

$

4,931

 

$

8,833

 

Reported as:

 

 

 

 

 

 

 

Current

 

$

743

 

$

2,092

 

$

2,835

 

Non-current

 

3,159

 

2,839

 

5,998

 

Total, net

 

$

3,902

 

$

4,931

 

$

8,833

 

 

 

 

 

 

Financed

 

 

 

 

 

Lease

 

Service Contracts

 

 

 

June 30, 2016

 

Receivables

 

and Other

 

Total

 

Gross

 

$

4,998

 

$

5,840

 

$

10,838

 

Residual value

 

 

 

 

Unearned income

 

(623

)

 

(623

)

Allowance for credit loss

 

 

 

 

Total, net

 

$

4,375

 

$

5,840

 

$

10,215

 

Reported as:

 

 

 

 

 

 

 

Current

 

$

840

 

$

1,778

 

$

2,618

 

Non-current

 

3,535

 

4,062

 

7,597

 

Total, net

 

$

4,375

 

$

5,840

 

$

10,215

 

 

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Table of Contents

 

Actual cash collections may differ from the contracted maturities due to early customer buyouts, refinancing, or defaults. Future minimum lease payments to be received as of December 31, 2016 are presented as follows (in thousands):

 

Year Ending June 30,

 

 

 

Amount

 

2017 (remaining six months)

 

 

 

$

387

 

2018

 

 

 

930

 

2019

 

 

 

930

 

2020

 

 

 

930

 

2021

 

 

 

930

 

2022

 

 

 

310

 

Total

 

 

 

$

4,417

 

 

Inventories

 

Inventories consisted of the following (in thousands):

 

 

 

December 31,

 

June 30,

 

 

 

2016

 

2016

 

Raw materials

 

$

46,074

 

$

50,480

 

Work-in-process

 

19,567

 

20,190

 

Finished goods

 

51,261

 

45,317

 

Inventories

 

$

116,902

 

$

115,987

 

 

Property and equipment, net

 

Property and equipment, net consisted of the following (in thousands):

 

 

 

December 31,

 

June 30,

 

 

 

2016

 

2016

 

Furniture and fixtures

 

$

4,505

 

$

4,527

 

Computer and office equipment

 

11,696

 

11,485

 

Software

 

11,352

 

11,104

 

Leasehold improvements

 

22,631

 

21,632

 

Machinery and equipment

 

49,316

 

47,171

 

Construction in progress

 

2,413

 

4,412

 

 

 

101,913

 

100,331

 

Less: Accumulated depreciation

 

(76,946

)

(72,453

)

Property and equipment, net

 

$

24,967

 

$

27,878

 

 

Depreciation expense related to property and equipment for the three and six months ended December 31, 2016 was $2.6 million and $5.3 million, respectively. Depreciation expense related to property and equipment for the three and six months ended December 31, 2015 was $2.5 million and $5.1 million, respectively.

 

3. Goodwill and Intangible Assets

 

Goodwill

 

Activity related to goodwill consisted of the following (in thousands):

 

 

 

Six Months

 

Year

 

 

 

Ended

 

Ended

 

 

 

December 31,

 

June 30,

 

 

 

2016

 

2016

 

Balance at the beginning of the period

 

$

57,848

 

$

58,054

 

Currency translation

 

(136

)

(206

)

Balance at the end of the period

 

$

57,712

 

$

57,848

 

 

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Table of Contents

 

In the second quarter of fiscal 2017, 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.

 

Intangible Assets

 

The Company’s unamortized intangible assets associated with completed acquisitions at December 31, 2016 and June 30, 2016 are as follows (in thousands):

 

 

 

 

 

December 31, 2016

 

June 30, 2016

 

 

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

Net

 

Carrying

 

Accumulated

 

Net

 

 

 

Useful Lives

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

(in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

5 — 6

 

$

46,743

 

$

(43,109

)

$

3,634

 

$

46,743

 

$

(39,132

)

$

7,611

 

 

The Company did not identify any triggering events that would indicate potential impairment of its definite-lived intangible and long-lived assets as of December 31, 2016 and June 30, 2016.

 

Amortization expense related to intangible assets for the three and six months ended December 31, 2016 was $2.0 million and $4.0 million, respectively. Amortization expense related to intangible assets for the three and six months ended December 31, 2015 was $2.0 million and $4.0 million, respectively.

 

The estimated future amortization expense of purchased intangible assets as of December 31, 2016 is as follows (in thousands):

 

Year Ending June 30,

 

Amount

 

2017 (remaining 6 months)

 

$

3,634

 

 

4. Foreign Exchange Instruments

 

The Company utilizes foreign currency forward contracts with well-known financial institutions to manage its exposure to fluctuations in foreign currency exchange rates on certain intercompany balances and foreign currency denominated cash and customer receivables. 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 December 31, 2016 and June 30, 2016.

 

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 expense, net” on the condensed consolidated statements of operations in three and six months ended December 31, 2016 and 2015 is as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Foreign currency exchange loss on foreign contracts

 

$

(604

)

$

(890

)

$

(1,167

)

$

(2,303

)

Foreign currency transactions gain (loss)

 

(48

)

(42

)

84

 

432

 

 

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Table of Contents

 

5. Financial Instruments

 

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 that these investments are 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.

 

The Company defines fair value as the price 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:

 

Level 1— Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

 

Level 2— Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

 

·                  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 3— Unobservable inputs that cannot be corroborated by observable market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

 

The following tables summarize the amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category for cash, cash equivalents and short-term investments (in thousands):

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

 

 

 

 

Gross

 

Gross

 

Cash and

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Cash

 

Short-term

 

 

 

Cost

 

Gains

 

Losses

 

Equivalents

 

Investments

 

Cash

 

$

67,350

 

$

 

$

 

$

67,350

 

$

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

2,122

 

 

 

2,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

38,993

 

 

(85

)

 

38,908

 

Total

 

$

108,465

 

$

 

$

(85

)

$

69,472

 

$

38,908

 

 

 

 

June 30, 2016

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

 

 

 

 

Gross

 

Gross

 

Cash and

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Cash

 

Short-term

 

 

 

Cost

 

Gains

 

Losses

 

Equivalents

 

Investments

 

Cash

 

$

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 agency 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

 

 

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Table of Contents

 

Certain investments in the table above are classified as having Level 2 inputs 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.

 

The Company had investments that were in an unrealized loss position as of December 31, 2016. The Company determined that (i) it does not have the intent to sell any of these investments and (ii) it is not likely that it will be required to sell any of these investments before recovery of the entire amortized cost basis. The Company reviews its investments quarterly to identify and evaluate investments that have an indication of possible impairment. As of December 31, 2016, the Company anticipates that it will recover the entire carrying value of such investments and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the three and six months ended December 31, 2016.

 

Contractual maturities of available-for-sale securities at December 31, 2016 were as follows (in thousands):

 

 

 

December 31, 2016

 

 

 

Amortized

 

Estimated

 

 

 

Cost

 

Fair Value

 

Due in 1 year or less

 

$

14,122

 

$

14,110

 

Due in 1-2 years

 

26,993

 

26,920

 

 

 

$

41,115

 

$

41,030

 

 

The following table summarizes the available-for-sale debt securities that were in a continuous unrealized loss position, but were not deemed to be other-than-temporarily impaired (in thousands):

 

 

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

Unrealized

 

Estimated

 

 

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency securities

 

$

(12

)

$

11,988

 

$

(73

)

$

26,920

 

$

(85

)

$

38,908

 

Total

 

$

(12

)

$

11,988

 

$

(73

)

$

26,920

 

$

(85

)

$

38,908

 

June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

$

(3

)

$

6,325

 

$

(3

)

$

3,160

 

$

(6

)

$

9,485

 

U. S. government agency securities

 

 

 

(17

)

19,988

 

(17

)

19,988

 

Total

 

$

(3

)

$

6,325

 

$

(20

)

$

23,148

 

$

(23

)

$

29,473

 

 

The Company held a total of 13 positions as of December 31, 2016 and 11 positions as of June 30, 2016 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 December 31, 2016 and June 30, 2016 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 three and six months ended December 31, 2016 and the year ended June 30, 2016.

 

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Table of Contents

 

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 flow 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 the Company’s market capitalization. The Company did not record any impairment charges for non-marketable equity investments or non-financial assets in the three and six months ended December 31, 2016.

 

The following table summarizes the carrying values and estimated fair values of our short-term and long-term debt (in thousands):

 

 

 

December 31, 2016

 

June 30, 2016

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

3.75% Convertible Notes

 

$

 

$

 

$

36,400

 

$

36,487

 

3.50% Convertible Notes

 

43,642

 

47,472

 

43,195

 

51,450

 

3.50% Series A Convertible Notes

 

67,748

 

74,785

 

66,613

 

81,053

 

Secured Loan (1)

 

58,778

 

58,778

 

64,204

 

64,204

 

Total

 

$

170,168

 

$

181,035

 

$

210,412

 

$

233,194

 

 


(1)         The carrying value of the Secured Loan approximates fair value as the Company did not elect the fair value option for the Secured Loan.

 

The Convertible Notes are measured on a non-recurring basis using Level 2 inputs based upon observable inputs of the Company’s underlying stock price and the time value of the conversion option, since an observable quoted price of the Convertible Notes is not readily available.

 

6. Commitments and Contingencies

 

Operating Lease Agreements

 

The Company leases office and manufacturing space under non-cancelable operating leases with various expiration dates through December 2025. In October 2016, the Company signed a lease extension on its Madison, Wisconsin facility through 2025, which would have expired in 2018. Accordingly, the Company’s lease obligations increased from $39.9 million as of June 30, 2016 to $50.0 million as of December 31, 2016.

 

Future minimum lease payments under non-cancelable operating lease agreements as of December 31, 2016 are as follows (in thousands):

 

 

 

Operating

 

Year Ending June 30,

 

Leases

 

2017 (remaining 6 months)

 

$

4,489

 

2018

 

8,385

 

2019

 

6,404

 

2020

 

6,142

 

2021

 

5,925

 

Thereafter

 

18,690

 

Total

 

$

50,035

 

 

15



Table of Contents

 

The Company’s contractual obligations were presented in the Annual Report on Form 10-K for the previous annual reporting period ended June 30, 2016. As discussed in Note 8, in August 2016, the Company settled the remaining approximately $36.6 million in aggregate principal amount of the 3.75% Convertible Senior Notes and accrued interest for $37.3 million in cash in its first fiscal quarter. During the second fiscal quarter, the Company repaid $5.0 million of its Secured Loan. Except for the change in lease obligations presented in the above table and a reduction of the Company’s Notes and Secured Loan, there has been no significant changes outside of the ordinary course of business in those obligations during the three and six months ended December 31, 2016.

 

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, 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 the Company’s financial condition or operating results. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’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.

 

Software License Indemnity

 

Under the terms of the Company’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 a 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 December 31, 2016.

 

7. Share-Based Compensation

 

The following table summarizes the share-based compensation charges included in the Company’s condensed consolidated statements of operations and comprehensive loss (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Cost of revenue

 

$

418

 

$

433

 

$

942

 

$

822

 

Research and development

 

501

 

622

 

1,164

 

1,171

 

Selling and marketing

 

686

 

758

 

1,308

 

1,402

 

General and administrative

 

1,309

 

1,552

 

2,973

 

2,484

 

 

 

$

2,914

 

$

3,365

 

$

6,387

 

$

5,879

 

 

8. Debt

 

First 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”). As required by the terms of the financing, upon the closing of the financing in January 2016, the Company 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 Senior Notes for $66.6 million in cash. In August 2016, the Company settled the remaining approximately $36.6 million in aggregate principal amount of the 3.75% Convertible Senior Notes and accrued interest for $37.3 million in cash. 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 Senior 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 Senior 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.

 

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The covenants in the Secured Loan include:

 

·                  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.

 

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% of the outstanding amount if the Secured Loan is repaid or accelerated within the first year and 1% of the outstanding amount if the Secured Loan is repaid or accelerated within the second year. During the second fiscal quarter of 2017, the Company repaid $5.0 million of its Secured Loan. In conjunction with the payment, the Company and Cerberus entered into an amendment to the Secured Loan agreement to modify certain financial covenants and the Company paid a fee of $0.3 million.

 

3.75% Convertible Senior Notes due August 2016

 

On August 1, 2011, the Company issued the 3.75% Convertible Senior Notes to certain qualified institutional buyers, or QIBs. The 3.75% Convertible Senior Notes were offered and sold to the QIBs pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), 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 Long-term Debt) were amortized to interest expense using the effective interest method over five years. The 3.75% Convertible Senior Notes bore 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 Senior Notes matured on August 1, 2016. A portion of these notes were redeemed in January 2016, and the remainder of these notes was redeemed on August 1, 2016, as discussed further below.

 

The 3.75% Convertible Senior 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 Senior Notes may convert their 3.75% Convertible Senior 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 Senior Notes could convert their 3.75% Convertible Senior 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 Senior Notes for each trading day of that Note 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; (3) if the Company calls any or all of the 3.75% Convertible Senior 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% Convertible Senior 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 Senior 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 Senior Notes being converted. The initial conversion rate was 105.5548 shares of the Company’s common stock per $1,000 principal amount of 3.75% Convertible Senior Notes (which represents an initial conversion price of approximately $9.47 per share of the Company’s common stock).

 

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In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company separately accounts for the liability and equity conversion components of the 3.75% Convertible Senior Notes. The principal amount of the liability component of the 3.75% Convertible Senior 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 Senior Notes using the effective interest method over five years.

 

In January 2016, the Company repurchased approximately $63.4 million in aggregate principal amount of the 3.75% Convertible Senior Notes for $66.6 million in cash. In August 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.

 

3.50% Convertible Senior Notes due February 2018

 

In February 2013, the Company issued $115.0 million aggregate principal amount of its 3.50% Convertible Senior Notes to certain Qualified Institutional Buyers or QIBs. The 3.50% Convertible Senior 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 Long-term Debt) are both being amortized to interest expense using the effective interest method over five years. The 3.50% Convertible Senior 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 Senior 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 Senior 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 Options and 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 condensed consolidated balance sheet as of December 31, 2016.

 

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3.50% Series A Convertible Senior Notes due February 2018

 

On 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 in 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 3.50% 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 Note 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% Series A 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.

 

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.

 

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The following table presents the carrying values of all Convertible Notes and notes issued pursuant to the Secured Loan (collectively, “Notes”) as of December 31, 2016 (in thousands):

 

 

 

 

 

3.50%

 

3.50%

 

 

 

 

 

Secured

 

Convertible

 

Series A

 

 

 

 

 

Loan

 

Notes

 

Convertible Notes

 

Total

 

Carrying amount of the equity conversion component

 

$

 

$

 

$

7,844

 

$

7,844

 

Principal amount of the Notes

 

62,375

 

44,654

 

70,346

 

177,375

 

Unamortized debt costs

 

(2,477

)

(1,012

)

 

(3,489

)

Unamortized debt discount

 

(1,120

)

 

(2,598

)

(3,718

)

Net carrying amount

 

$

58,778

 

$

43,642

 

$

67,748

 

$

170,168

 

 

A summary of interest expense on the Notes is as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Interest expense related to contractual interest coupon

 

$

2,339

 

$

1,990

 

$

4,870

 

$

3,935

 

Interest expense related to amortization of debt discount

 

640

 

1,950

 

1,456

 

3,870

 

Interest expense related to amortization of debt issuance costs

 

379

 

368

 

782

 

771

 

 

 

$

3,358

 

$

4,308

 

$

7,108

 

$

8,576

 

 

9. Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive loss consist of net loss, unrealized gains and losses on available-for-sale investments, changes in foreign currency exchange rate translation and net changes related to defined benefit pension plan. These components are excluded from earnings and reported as a component of 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 in stockholders’ equity. Revenues and expenses are translated at average exchange rates in effect during the period.

 

The components of accumulated other comprehensive loss in the equity section of the balance sheets are as follows (in thousands):

 

 

 

December 31,

 

June 30,

 

 

 

2016

 

2016

 

Net unrealized loss on short-term investments

 

$

(85

)

$

(15

)

Cumulative foreign currency translation adjustment

 

(85

)

1,121

 

Defined benefit pension obligation

 

(2,066

)

(2,066

)

Accumulated other comprehensive loss

 

$

(2,236

)

$

(960

)

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition as of December 31, 2016 and results of operations for the three and six months ended December 31, 2016 and 2015 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. Statements made in this Form 10-Q report that are not statements of historical fact are forward-looking statements and are subject to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report relate, but are not limited, to: our future results of operations and financial position, including the sufficiency of cash resources and expected cash flows to fund future operations, including the next 12 months; our backlog and expectations regarding age-outs, cancellations of contracts and foreign currency impacts, the effects of our process improvements on age-outs, backlog and revenue; expected uses of cash during fiscal 2017; the anticipated drivers of our future capital requirements; the success of the multi-leaf collimator, or InCise MLC for the CyberKnife Systems, its impact on our business; our expectations regarding the factors that will impact long-term success, sales, competitive positioning and long-term success for our CyberKnife and TomoTherapy Systems; our belief that TomoTherapy Systems offer clinicians and patients significant benefits over other radiation therapy systems in the market; the anticipated risks associated with our foreign operations and fluctuations in the U.S. dollar and foreign currencies as well as our ability to mitigate such risks; the sufficiency of our cash, cash flow equivalents and investments to meet our anticipated cash needs for working capital and capital expenditures and our business strategy, plans and objectives. Forward-looking statements generally can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “may,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, including those risks discussed in this quarterly report, in particular under the heading “Risk Factors” in Part II, Item 1A as well as the risks detailed in Part I, Item 1A of the Company’s annual report on Form 10-K for fiscal year 2016, and other filings we make with the Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements are made and are based on information available to the Company at the time those statements are made and/or management’s good faith belief as of that time with respect to future events. The Company assumes no obligation to update forward-looking statements to reflect actual performance or results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. Accordingly, investors should not place undue reliance on any forward-looking statements.

 

In this report, “Accuray,” the “Company,” “we,” “us,” and “our” refer to Accuray Incorporated and its subsidiaries.

 

Overview

 

Products and Markets

 

We are a radiation oncology company that develops, manufactures, sells and supports precise, innovative treatment solutions which set the standard of care, with the aim of helping patients live longer, better lives. Our leading-edge technologies, the CyberKnife and TomoTherapy Systems, and Radixact, the next generation TomoTherapy System platform are designed to deliver advanced radiation therapy including radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image-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, radiation oncology, with advanced capabilities that offer increased treatment flexibility to meet the needs of an expanding patient population including patients requiring retreatment with radiation therapy.

 

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 be treated with radiation, who may not be good candidates for surgery, or who desire non-surgical treatments. The use of radiosurgery with CyberKnife Systems to treat tumors throughout the body has grown significantly in recent years, but currently only a small portion of the patients who develop tumors treatable with CyberKnife 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, the CyberKnife 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.

 

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Our CyberKnife M6 Series Systems have the option of: fixed collimator, Iris Variable Aperture Collimator and/or multi-leaf collimator, or InCise MLC. The InCise MLC is designed specifically for the M6 Series. With the addition of the 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 tumor types. The addition of the InCise MLC, now makes 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.

 

We believe the long 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 InCise MLCs that meet 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;

 

·                  Continued advances in our technology that improve the quality of treatments and ease of use of the CyberKnife Systems;

 

·                  Receipt of regulatory approvals in various countries which are expected to improve access to radiosurgery with the CyberKnife Systems in such countries;

 

·                  Medical insurance reimbursement policies that cover CyberKnife System treatments; and

 

·                  Our ability to expand sales of CyberKnife Systems in countries throughout the world where we do not currently sell CyberKnife Systems.

 

TomoTherapy and Radixact Systems

 

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 specifically designed for image-guided intensity-modulated radiation therapy (IG-IMRT). The TomoTherapy System is cleared for sale by the FDA and in most major markets globally. The TomoTherapy Systems include the TomoTherapy H Series Systems with 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 the patient’s tumor while minimizing dose to normal, healthy tissue, resulting in fewer side effects for 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 available and used in developed countries for decades, though many developing countries do not currently have a sufficient number of radiation therapy systems to adequately treat their domestic cancer patient populations. The number of radiation therapy systems in use and sold each year is currently many times larger than the number of radiosurgery systems. The new Radixact System is the next generation TomoTherapy platform and is currently approved for sale in the US, Europe, Japan and other territories. The Radixact System is a new, smart system with integrated Accuray Precision treatment planning software and the new 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 for more patients, faster, with simpler, more automated workflows. We believe the TomoTherapy Systems and the Radixact System 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 Systems and adoption of the Radixact System in markets where it is available;

 

·                  Greater awareness among doctors and patients of the unique benefits of radiation therapy using TomoTherapy and Radixact Systems because of their ring gantry architecture and ability to deliver treatment from 360 degrees around the patient;

 

·                  Advances in our technology which improve the quality of treatments and ease of use of TomoTherapy and Radixact Systems;

 

·                  Greater awareness among doctors of the now-established reliability of TomoTherapy Systems;

 

·                  Our ability to expand sales of TomoTherapy Systems in countries throughout the world; and

 

·                  Our ability to scale up commercial launch of the Radixact System in those markets where it is approved.

 

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Table of Contents

 

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 and two years. The length of time between receipt of a signed contract and revenue recognition is generally governed by 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 sales agents. In addition to our offices in the United States, we have sales and service offices in Europe, Asia, South America, and throughout the world.

 

Key Metrics

 

Backlog

 

For orders that cover both products and services, only the portion of the order that is recognizable as product revenue is reported as backlog. The portion of the order that is recognized as service revenue (for example, Post-Contract Customer Support (PCS), installation, training and professional services) is not included in reported backlog. Product backlog totaled $426.2 million as of December 31, 2016 compared to $405.9 million as of June 30, 2016.

 

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 properly executed by both the customer and us. A customer purchase order that incorporates the terms of our contract quote will be considered equivalent to a signed and executed 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 customer where a deposit is deemed not necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, customers with 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;

 

·                  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 CyberKnife Systems, TomoTherapy Systems, Radixact System and related upgrades, we cannot provide assurance that we will convert backlog into recognized revenue due primarily to factors outside of our control. The 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 in 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 may age-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 impact backlog. Generally, strengthening in the U.S. Dollar will negatively impact 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.

 

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Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

(Dollars in thousands)

 

2016

 

2015

 

2016

 

2015

 

Gross orders

 

$

78,454

 

$

67,078

 

$

128,789

 

$

132,006

 

Net orders

 

54,069

 

42,679

 

91,256

 

87,478

 

Order backlog at the end of the period

 

426,158

 

366,668

 

426,158

 

366,668

 

 

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.

 

Gross orders increased by $11.4 million for the three months ended December 31, 2016, as compared to the three months ended December 31, 2015.  This was a result of an increase of $10.5 million in new system order volume compared to the same prior year period. The CyberKnife System order volume drove the increase for this period and was partially offset by a decrease in order volume for the TomoTherapy System and upgrade orders and other adjustments which increased by $0.9 million in the three months ended December 31, 2016 as compared to the same prior year period.

 

Gross orders decreased by $3.2 million for the six months ended December 31, 2016, as compared to the six months ended December 31, 2015. This was a result of a decrease of $8.7 million in new system order volume compared to the same prior year period. The CyberKnife System order volume drove the decrease for this period and was partially offset by an increase in order volume for the TomoTherapy System. The decline was offset by upgrade orders and other adjustments which increased by $5.5 million in the six months ended December 31, 2016 as compared to the same prior year period.

 

Net Orders

 

Net orders increased by $11.4 million for the three months ended December 31, 2016, as compared to the three months ended December 31, 2015, resulting from the increase in gross orders of $11.4 million and foreign currency and other adjustments of $1.4 million. These increases were offset by cancellations of $0.6 million and net age-outs of $0.8 million.

 

·                  There were age-outs of $19.9 million for the three months ended December 31, 2016, an increase of $0.8 million from the prior year period due to more systems exceeding the 2.5 year criteria specified above. The age-outs for the three months ended December 31, 2016 included $1.9 million of age-ins which represent orders that have 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 cancellations of $3.6 million and $3.0 million in the three months ended December 31, 2016 and 2015, respectively. Cancellations are outside of our control and 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 $0.9 million and $2.3 million in the three months ended December 31, 2016 and 2015, respectively.

 

Net orders increased by $3.8 million for the six months ended December 31, 2016, as compared to the six months ended December 31, 2015, resulting from fewer net age-outs of $7.0 million and positive currency impacts of $1.1 million.  These items were partially offset by increased cancellations of $1.1 million and a decline in gross orders of $3.2 million as compared to the same prior year period.

 

·                  There were net age-outs of $30.6 million for the six months ended December 31, 2016, a decrease of $7.0 million from the prior year period due to fewer systems exceeding the 2.5 year criteria specified above. The age-outs of $30.6 million for the six months ended December 31, 2016 included age-ins of $1.9 million which would represent orders that have 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 cancellations of $7.1 million and $6.0 million in the six months ended December 31, 2016 and 2015, respectively. Cancellations are outside of our control and 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 an increase in net orders of $0.1 million and a decrease in net orders of $1.0 million in the six months ended December 31, 2016 and 2015, respectively.

 

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Table of Contents

 

Currently, we expect age-outs in the third quarter of this fiscal year to be approximately $11.0 million as compared to $19.9 million in age-outs recorded during the three months ended December 31, 2016.

 

Results of Operations — Three and six months ended December 31, 2016 and 2015

 

 

 

Three Months Ended December 31,

 

Six Months Ended December 31,

 

 

 

2016

 

2015

 

2016-2015

 

2016

 

2015

 

2016-2015

 

(Dollars in thousands)

 

Amount

 

% (a)

 

Amount

 

% (a)

 

% change

 

Amount

 

% (a)

 

Amount

 

% (a)

 

% change

 

Products

 

$

35,398

 

40

%

$

55,759

 

51

%

(37

)%

$

70,997

 

41

%

$

95,754

 

48

%

(26

)%

Services

 

52,104

 

60

 

53,153

 

49

 

(2

)

103,011

 

59

 

102,789

 

52

 

 

Net revenue

 

$

87,502

 

100

%

$

108,912

 

100

%

(20

)%

$

174,008

 

100

%

$

198,543

 

100

%

(12

)%

Gross profit

 

$

31,387

 

36

%

$

42,571

 

39

%

(26

)%

$

62,731

 

36

%

$

76,469

 

39

%

(18

)%

Products gross profit

 

12,429

 

35

 

23,042

 

41

 

(46

)

24,676

 

35

 

40,020

 

42

 

(38

)

Services gross profit

 

18,958

 

36

 

19,529

 

37

 

(3

)

38,055

 

37

 

36,449

 

35

 

4

 

Research and development expenses

 

11,944

 

14

 

14,931

 

14

 

(20

)

24,173

 

14

 

29,227

 

15

 

(17

)

Selling and marketing expenses

 

13,904

 

16

 

15,076

 

14

 

(8

)

28,222

 

16

 

28,493

 

14

 

(1

)

General and administrative expenses

 

10,362

 

12

 

12,688

 

12

 

(18

)

21,706

 

12

 

26,104

 

13

 

(17

)

Other expense, net

 

4,120

 

5

 

5,070

 

5

 

(19

)

8,125

 

5

 

10,161

 

5

 

(20

)

Provision for (benefit from) income taxes

 

426

 

1

 

833

 

1

 

(49

)

(200

)

0

 

1,537

 

1

 

(113

)

Net loss

 

$

 

(9,369

)

11

%

$

(6,027

)

6

%

55

%

$

(19,295

)

11

%

$

(19,053

)

10

%

1

%

 


(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 Revenue

 

Product Net Revenue. Product net revenue decreased by $20.4 million for the three months ended December 31, 2016, as compared to the three months ended December 31, 2015, primarily due to a decrease of $18.3 million in revenue from system sales resulting from a shift in product and channel mix as we had fewer units of the CyberKnife and TomoTherapy systems taken to revenue as compared to the same period in the prior year. As our CyberKnife systems generally have a higher average sale price, the overall net product revenue decreased year-over-year. In addition, the decrease in revenue is attributable to a slight increase in the revenue conversion process mainly resulting from a higher percentage of order growth in our distributor channels which results in less control over the timing of revenue. There was also a decrease of $2.1 million in upgrade and other revenue as compared to the prior year period. From time to time, we may amend sales agreements for system orders in backlog between Accuray and our distributors in order to shift responsibility of the installation of the system from us to the distributor. In such cases, the total purchase price of the system will be reduced accordingly as negotiated with the distributor on a case by case basis. This may result in us recognizing revenue for such systems earlier than previously anticipated. For the quarter ended December 31, 2016, the amount of revenue recognized as a result of such amendments accounted for less than 5% of our total revenue.

 

Product net revenue decreased by $24.8 million for the six months ended December 31, 2016, as compared to the six months ended December 31, 2015, primarily due to a decrease of $21.4 million revenue from new system sales resulting from product and channel mix as we had fewer units of the CyberKnife and TomoTherapy systems taken to revenue as compared to the same period in the prior year. As our CyberKnife systems generally have a higher average sale price, the overall net product revenue decreased year-over-year. In addition, the decrease in revenue is attributable to a slight increase in the revenue conversion process mainly resulting from a higher percentage of order growth in our distributor channels which results in less control over the timing of revenue. There was also a decrease of $3.4 million in upgrade and other revenue as compared to the prior year period.

 

Services Net Revenue. Services net revenue decreased by $1.0 million for the three months ended December 31, 2016, as compared to the three months ended December 31, 2015. The decrease was driven by decreased installation and spare parts revenue of $1.9 million and a decrease in training revenue of $2.3 million. These decreases were offset by increased PCS revenue of $3.2 million due to an increased install base.

 

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Table of Contents

 

Services net revenue increased by $0.2 million for the six months ended December 31, 2016, as compared to the six months ended December 31, 2015. The increase was driven by increased PCS revenue of $4.4 million due to an increased install base and was offset by a decrease in training revenue of $1.5 million, spare parts revenue of $1.5 million and installation revenue of $1.2 million.

 

Percentage of net revenue by geographic region, based on the shipping location of our customers, is as follows (in thousands, except percentages):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net revenue

 

$

87,502

 

$

108,912

 

$

174,008

 

$

198,543

 

Americas

 

45

%

47

%

46

%

48

%

Europe, Middle East, India and Africa

 

29

%

33

%

27

%

30

%

Asia Pacific (excluding Japan and India)

 

10

%

14

%

12

%

16

%

Japan

 

16

%

6

%

15

%

6

%

 

Revenue derived from sales outside of the Americas region was $48.3 million and $57.9 million for the three months ended December 31, 2016 and 2015, respectively, and represented 55% and 53% of our net revenue during these periods, respectively. Revenue derived from sales outside of the Americas region was $94.2 million and $102.3 million for the six months ended December 31, 2016 and 2015, respectively, and represented 54% and 52% of our net revenue during these periods, respectively.

 

Gross Profit

 

Overall gross profit for the three months ended December 31, 2016, decreased $11.2 million, or 26%, as compared to the three months ended December 31, 2015. Product gross profit decreased 46%, or $10.6 million, primarily due to the decrease in systems taken to revenue as well as lower margins due to product and channel mix. Service gross profit decreased 3%, or $0.6 million, as a result of lower service revenues of $1.0 million, partially offset by decreased service costs of $0.4 million resulting from reductions in departmental spending due to headcount decreases and lower parts utilization.

 

Overall gross profit for the six months ended December 31, 2016, decreased $13.7 million, or 18%, as compared to the six months ended December 31, 2015. Product gross profit decreased 38%, or $15.3 million, primarily due to the decrease in systems taken to revenue as well as lower margins due to product and channel mix. Service gross profit increased 4%, or $1.6 million, as a result of higher service revenues of $0.2 million and decreased service costs of $1.4 million resulting from reductions in departmental spending due to headcount decreases and lower parts utilization.

 

Research and Development

 

Research and development expenses were $11.9 million in the three months ended December 31, 2016 as compared to $14.9 million in the three months ended December 31, 2015, which represents a decrease of $3.0 million, or 20%. The decrease was primarily due to a $1.2 million decrease in consulting fees as a result of completion of roadmap development projects and decreased compensation related expenses of $0.9 million due to lower headcount and delays in hiring as compared with the prior fiscal year period. Additionally, there was a decrease of $0.4 million in project-related expenses due to deferral of certain projects as well as a decrease of $0.5 million in IT and facilities allocated expenses.

 

Research and development expenses were $24.2 million in the six months ended December 31, 2016 as compared to $29.2 million in the six months ended December 31, 2015, which represents a decrease of $5.1 million, or 17%. The decrease was primarily due to a $2.3 million decrease in consulting fees as a result of completion of roadmap development projects and decreased compensation related expenses of $1.3 million due to lower headcount and delays in hiring as compared with the prior fiscal period. Additionally, there was a decrease of $0.6 million in project-related expenses due to deferral of certain projects as well as a decrease of $0.9 million in IT and facilities allocated expenses.

 

Selling and Marketing

 

Selling and marketing expenses for the three months ended December 31, 2016 were $13.9 million as compared to $15.1 million for the three months ended December 31, 2015, which represents a decrease of $1.2 million, or 8%. The decrease was primarily because of $1.4 million in lower marketing related expenses driven primarily by the timing of tradeshows as well as a decrease in compensation costs of $0.2 million. These decreases were offset by higher outside services costs of $0.4 million related to new marketing programs.

 

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Table of Contents

 

Selling and marketing expenses for the six months ended December 31, 2016 were $28.2 million as compared to $28.5 million for the six months ended December 31, 2015, which represents a decrease of $0.3 million, or 1%. The decrease was primarily because of a $1.4 million lower compensation expense related to a decrease in commission expense. The decrease was offset by higher outside services costs of $0.7 million related to new marketing programs and $0.3 million in marketing expenses related to trade shows and $0.1 million in IT and facilities allocated expenses.

 

General and Administrative

 

General and administrative expenses for the three months ended December 31, 2016 were $10.4 million as compared to $12.7 million for the three months ended December 31, 2015, which represents a decrease of $2.3 million, or 18%. This decrease was mainly attributable to $2.5 million in lower legal fees associated with litigation settlements in the second quarter of fiscal year 2016 as described in Note 7 to the financial statements in our Annual Report on Form 10-K for the year ended June 30, 2016. In addition, personnel related expenses decreased $0.2 million due to lower bonus accruals as compared to the same period in the prior year, as well as lower outside services costs of $0.3 million. These decrease were partially offset by higher IT and facilities allocated expenses of $0.6 million.

 

General and administrative expenses for the six months ended December 31, 2016 were $21.7 million as compared to $26.1 million for the six months ended December 31, 2015, which represents a decrease of $4.4 million, or 17%. This decrease was mainly attributable to $5.7 million in lower legal fees associated with litigation settlements in the first and second quarter of fiscal year 2016 as described in Note 7 to the financial statements in our Annual Report on Form 10-K for the year ended June 30, 2016. This decrease was partially offset by increased employee compensation expenses of $0.1 million and higher IT and facilities allocated expenses of $1.2 million.

 

Other Expense, net

 

Other expense, net for the three months ended December 31, 2016 was $4.1 million as compared to $5.1 million for the three months ended December 31, 2015, which represents a decrease of $1.0 million, or 19%. There was a decrease in interest expense of $1.0 million due to the settlement of the 3.75% Convertible Senior Notes in the first quarter of fiscal 2017. In addition, there was a decrease in foreign exchange losses of $0.3 million, related primarily to foreign exchange hedging activities. These decreases were offset by a $0.3 million fee related to the amendment of certain covenants to our Secured Loan.

 

Other expense, net for the six months ended December 31, 2016 was $8.1 million as compared to $10.2 million for the six months ended December 31, 2015, which represents a decrease of $2.1 million, or 20%. There was a decrease in interest expense of $1.5 million due to the settlement of the 3.75% Convertible Senior Notes in the first quarter of fiscal 2017. In addition, there was a decrease in foreign exchange losses of $0.8 million, related primarily to foreign exchange hedging activities. These decreases were offset by a $0.3 million fee related to the amendment of certain covenants to our Secured Loan.

 

Provision for Income Taxes

 

On a quarterly basis, the Company provides for income taxes based upon an estimated annual effective income tax rate. The Company recognized income taxes expense of $0.4 million and an income tax benefit of $0.2 million for the three and six months ended December 31, 2016, respectively. Income tax expense was $0.8 million and $1.5 million for the three and six months ended December 31, 2015, respectively. The decrease in tax expense for the three and six months ended December 31, 2016 as compared to the prior year comparable periods was due to a decrease in foreign earnings. In addition, the decline in income tax expense for the six months ended December 31, 2016 was attributable to the recognition of an income tax benefit of approximately $1.4 million in the first quarter of fiscal 2017 as a result of the completion of tax audits by the Swiss authorities for the period from fiscal 2011 through fiscal 2015.

 

Liquidity and Capital Resources

 

At December 31, 2016, we had $69.5 million in cash and cash equivalents and $38.9 million in short-term investments, for a total of $108.4 million. Refer to Note 8, “Debt” to the condensed consolidated financial statements for discussion of the Convertible Notes and our Senior Secured Term Loan. Based on our 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.

 

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Table of Contents

 

As of December 31, 2016, we had approximately $55.6 million of cash and cash equivalents at our foreign subsidiaries. The earnings of our foreign subsidiaries are considered to be indefinitely reinvested outside the U.S. and unavailable for distribution in the form of dividends or otherwise. Accordingly, no provisions for U.S. income taxes have been provided thereon. We anticipate that we have adequate liquidity and capital resources for the next twelve months and do not anticipate the need to repatriate the undistributed earnings of our foreign subsidiaries at December 31, 2016.

 

Our cash flows for the six months ended December 31, 2016 and 2015 are summarized as follows (in thousands):

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2016

 

2015

 

Net cash provided by (used in) operating activities

 

$

(11,389

)

$

20,280

 

Net cash provided by (used in) investing activities

 

5,062

 

(7,750

)

Net cash used in financing activities

 

(41,170

)

(786

)

Effect of exchange rate changes on cash and cash equivalents

 

(2,802

)

(2,844

)

Net increase (decrease) in cash and cash equivalents

 

$

(50,299

)

$

8,900

 

 

Cash Flows From Operating Activities

 

Net cash used in operating activities in the six months ended December 31, 2016 was $11.4 million, as compared to $20.3 million provided by operating activities in the six months ended December 31, 2015. Net cash used in operating activities in the six months ended December 31, 2016 was primarily related to:

 

·                  Net loss, offset by non-cash items of $18.6 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, provision for doubtful accounts receivable and provision for excess and obsolete inventory;

 

·                  Decrease in restricted cash of $0.4 million due to releases of restrictions on cash related to VAT related guarantees;

 

·                  Increase in accounts receivable of $15.8 million as a result of the timing of revenue transactions in the second quarter of fiscal 2017, which collections are primarily expected in the third fiscal quarter of 2017;

 

·                  Increase in inventories of $2.6 million due to increases in purchases in the second quarter of fiscal year 2017 to support expected future Radixact sales and service needs that will begin to be utilized in the third fiscal quarter of 2017;

 

·                  Decrease in prepaid expenses and other assets of $1.4 million primarily due to the timing of payments to our vendors;

 

·                  Decrease in deferred revenue of $5.3 million primarily due to the timing of the sale transactions during the second quarter of fiscal year 2017;

 

·                  Decrease in deferred cost of revenue of $1.5 million primarily due to the release of costs upon revenue recognition;

 

·                  Increase in accounts payable of $10.1 million primarily due to timing of payments as there was fewer large value payments at the end of the second quarter of fiscal year 2017;

 

·                  Decrease in accrued liabilities of $3.4 million primarily related to a decrease in loan interest accrual of $1.1 million due to the settlement of the 3.75% Senior Notes in August 2016, a decrease in compensation related accruals of $2.4 million offset by an increase in accruals for taxes of $0.1 million; and

 

·                  Increase in customer advances of $3.1 million due mainly to increases in new customer orders.

 

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Table of Contents

 

Net cash provided by operating activities in the six months ended December 31, 2015 was primarily related to:

 

·                  Net loss, offset by non-cash items of $21.0 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, provision for doubtful accounts receivable and provision for excess and obsolete inventory;

 

·                  Decrease in restricted cash of $1.0 million due to releases of restrictions on cash related to bunker constructions during the year;

 

·                  Decrease in accounts receivable of $11.0 million as a result of collections on customer accounts in excess of billings resulting from significant sales transactions in the fourth fiscal quarter of 2015 that were collected in the first quarter of fiscal year 2016, partially offset by a higher volume of invoicing as compared to payments in the second quarter of fiscal year 2016;

 

·                  Increase in inventories of $5.7 million due to increases in purchases in the first half of fiscal year 2016 to support expected future sales and service needs that began to be utilized in the second half of fiscal 2016;

 

·                  Increase in prepaid expenses and other assets of $3.5 million primarily due to an increase in long-term accounts receivable of $6.5 million due to several large revenue contracts with extended payment terms. This was partially offset by a decrease of $1.4 million due to the settlement of value-add taxes in foreign locations, reduction of other prepaids of $0.7 million due to the release of vendor advances and amortization of prepayments for the ASTRO tradeshow offset by new additions, and a reduction in prepaid benefit and other costs of $0.9 million due to the timing of payments;

 

·                  Increase in deferred revenue of $5.9 million primarily due to additional product revenue deferrals added during the period in excess of the amount of deferred product revenue recognized;

 

·                  Increase in deferred cost of revenue of $2.7 million primarily due to the timing of inventory transfers to customers;

 

·                  Increase in accounts payable of $6.7 million primarily due to an increase in inventory purchasing activities in the first half of fiscal year 2016 and timing of payments as there was more large value payment activity at the end of prior year as compared with the end of the second quarter of fiscal year 2016;

 

·                  Increase in accrued liabilities of $5.4 million primarily related to an increase in legal accruals of $5.7 million due to litigation settlements as well as an increase in the bonus accrual of $1.1 million for the first half of fiscal 2016. These increases were partially offset by decreased revenue related accruals of $1.4 million due to the timing of payments; and

 

·                  Increase in customer advances of $0.3 million due mainly to payments received for future revenue deliverables.

 

Cash Flows From Investing Activities

 

Net cash provided by investing activities was $5.1 million for the six months ended December 31, 2016, which primarily consisted of the sales and maturities of investments of $23.2 million, offset by the purchases of short-term investments of $15.0 million and purchases of property and equipment of $3.1 million.

 

Net cash used in investing activities was $7.7 million for the six months ended December 31, 2015, which primarily consisted of purchases of short-term investments of $33.1 million and purchases of property and equipment of $4.1 million partially offset by sales and maturities of investments of $29.5 million.

 

Cash Flows From Financing Activities

 

Net cash used in financing activities during the six months ended December 31, 2016 was $41.2 million, which was primarily due to $36.6 million in payments made to convertible note holders for the settlement of the 3.75% Convertible Senior Notes and the $5.0 million early payment on the Secured Loan as discussed in Note 8 to the financial statements. In addition, there were $2.1 million in proceeds from employee stock plans which was partially offset by $0.7 million taxes paid related to net share settlements of equity awards.

 

29