aray-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

 

For the quarterly period ended March 31, 2018

 

or

 

 

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.  Yes  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  No

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

As of April 25, 2018, there were 85,638,116 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page No.

 

 

 

PART I.

Financial Information

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

3

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of March 31, 2018 and June 30, 2017

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended March 31, 2018 and 2017

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2018 and 2017

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 3.

Defaults Upon Senior Securities

37

 

 

 

Item 4.

Mine Safety Disclosures

37

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits

38

 

 

 

Signatures

 

39

 

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®, Accuray Precision®,CyberKnife®, Hi-Art®, PlanTouch®, Radixact®, RoboCouch®, StatRT®, Synchrony®, TomoH®, TomoHD®, TomoTherapy®, QuickPlan®, Xsight®, AutoSegmentation™, CTrue™, H™ Series, iDMS™, InCise™, Iris™, M6™ Series, OIS Connect™, PreciseART™, PreciseRTX™, TomoDirect™, TomoEdge™, TomoHDA™, TomoHelical™, Tomo Quality Assurance™, and VoLO™.

2


 

PART I.  FINANCIAL INFORMATION

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

Accuray Incorporated

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share amounts and par value)

 

 

 

March 31,

2018

 

 

June 30,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,392

 

 

$

72,084

 

Short-term investments

 

 

888

 

 

 

23,909

 

Restricted cash

 

 

1,880

 

 

 

12,829

 

Accounts receivable, net of allowance for doubtful accounts of $346 and

   $420 as of March 31, 2018 and June 30, 2017, respectively

 

 

81,846

 

 

 

72,789

 

Inventories

 

 

115,900

 

 

 

105,054

 

Prepaid expenses and other current assets

 

 

16,653

 

 

 

18,988

 

Deferred cost of revenue

 

 

2,933

 

 

 

3,350

 

Total current assets

 

 

290,492

 

 

 

309,003

 

Property and equipment, net

 

 

24,462

 

 

 

23,062

 

Goodwill

 

 

58,021

 

 

 

57,812

 

Intangible assets, net

 

 

857

 

 

 

964

 

Restricted cash

 

 

638

 

 

 

322

 

Other assets

 

 

12,849

 

 

 

15,301

 

Total assets

 

$

387,319

 

 

$

406,464

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

23,175

 

 

$

17,486

 

Accrued compensation

 

 

27,212

 

 

 

25,402

 

Other accrued liabilities

 

 

22,707

 

 

 

23,870

 

Short-term debt

 

 

 

 

 

113,023

 

Customer advances

 

 

22,652

 

 

 

16,926

 

Deferred revenue

 

 

84,058

 

 

 

87,785

 

Total current liabilities

 

 

179,804

 

 

 

284,492

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term other liabilities

 

 

11,073

 

 

 

10,068

 

Deferred revenue

 

 

17,343

 

 

 

13,823

 

Long-term debt

 

 

134,321

 

 

 

51,548

 

Total liabilities

 

 

342,541

 

 

 

359,931

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; authorized: 200,000,000 shares as of March 31, 2018

   and June 30, 2017, respectively; issued and outstanding: 85,583,802 and 83,739,804

   shares at March 31, 2018 and June 30, 2017, respectively

 

 

86

 

 

 

84

 

Additional paid-in-capital

 

 

516,173

 

 

 

496,887

 

Accumulated other comprehensive income (loss)

 

 

1,858

 

 

 

(52

)

Accumulated deficit

 

 

(473,339

)

 

 

(450,386

)

Total stockholders' equity

 

 

44,778

 

 

 

46,533

 

Total liabilities and stockholders' equity

 

$

387,319

 

 

$

406,464

 

 

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

3


 

Accuray Incorporated

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

 

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

43,244

 

 

$

48,032

 

 

$

129,266

 

 

$

119,029

 

Services

 

 

56,588

 

 

 

49,280

 

 

 

161,845

 

 

 

152,291

 

Total net revenue

 

 

99,832

 

 

 

97,312

 

 

 

291,111

 

 

 

271,320

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

25,332

 

 

 

29,574

 

 

 

74,291

 

 

 

75,895

 

Cost of services

 

 

38,251

 

 

 

32,313

 

 

 

103,110

 

 

 

97,269

 

Total cost of revenue

 

 

63,583

 

 

 

61,887

 

 

 

177,401

 

 

 

173,164

 

Gross profit

 

 

36,249

 

 

 

35,425

 

 

 

113,710

 

 

 

98,156

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,906

 

 

 

12,484

 

 

 

42,663

 

 

 

36,657

 

Selling and marketing

 

 

14,612

 

 

 

13,025

 

 

 

43,241

 

 

 

41,247

 

General and administrative

 

 

11,552

 

 

 

11,184

 

 

 

34,696

 

 

 

32,890

 

Total operating expenses

 

 

40,070

 

 

 

36,693

 

 

 

120,600

 

 

 

110,794

 

Loss from operations

 

 

(3,821

)

 

 

(1,268

)

 

 

(6,890

)

 

 

(12,638

)

Other expense, net

 

 

(4,465

)

 

 

(2,919

)

 

 

(14,774

)

 

 

(11,044

)

Loss before provision for income taxes

 

 

(8,286

)

 

 

(4,187

)

 

 

(21,664

)

 

 

(23,682

)

Provision for income taxes

 

 

566

 

 

 

842

 

 

 

1,289

 

 

 

642

 

Net loss

 

$

(8,852

)

 

$

(5,029

)

 

$

(22,953

)

 

$

(24,324

)

Net loss per share - basic and diluted

 

$

(0.10

)

 

$

(0.06

)

 

$

(0.27

)

 

$

(0.30

)

Weighted average common shares used in computing net loss per

   share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

85,459

 

 

 

82,913

 

 

 

84,594

 

 

 

82,268

 

Net loss

 

$

(8,852

)

 

$

(5,029

)

 

$

(22,953

)

 

$

(24,324

)

Foreign currency translation adjustment

 

 

909

 

 

 

435

 

 

 

1,467

 

 

 

(771

)

Unrealized gain (loss) on investments, net of tax

 

 

319

 

 

 

(6

)

 

 

443

 

 

 

(76

)

Comprehensive loss

 

$

(7,624

)

 

$

(4,600

)

 

$

(21,043

)

 

$

(25,171

)

 

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

4


 

Accuray Incorporated

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(22,953

)

 

$

(24,324

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,387

 

 

 

13,848

 

Share-based compensation

 

 

9,074

 

 

 

9,985

 

Amortization of debt issuance costs

 

 

1,259

 

 

 

1,165

 

Amortization and accretion of discount and premium on investments

 

 

(15

)

 

 

70

 

Accretion of interest on debt

 

 

2,589

 

 

 

2,117

 

Loss on sales of investment

 

 

77

 

 

 

 

Recovery of bad debt, net

 

 

(74

)

 

 

(64

)

Provision for write-down of inventories

 

 

1,104

 

 

 

1,131

 

(Gain) loss on disposal of property and equipment

 

 

(8

)

 

 

4

 

Loss on extinguishment of debt

 

 

3,452

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8,435

)

 

 

(28,676

)

Inventories

 

 

(14,656

)

 

 

(2,386

)

Prepaid expenses and other assets

 

 

3,851

 

 

 

(3,411

)

Deferred cost of revenue

 

 

630

 

 

 

2,474

 

Accounts payable

 

 

5,463

 

 

 

8,249

 

Accrued liabilities

 

 

(2,000

)

 

 

2,120

 

Customer advances

 

 

5,321

 

 

 

(2,914

)

Deferred revenues

 

 

(1,621

)

 

 

(2,907

)

Net cash used in operating activities

 

 

(9,555

)

 

 

(23,519

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment, net

 

 

(4,598

)

 

 

(3,619

)

Purchases of investments

 

 

(5,940

)

 

 

(14,992

)

Sales and maturities of investments

 

 

29,875

 

 

 

38,179

 

Net cash provided by investing activities

 

 

19,337

 

 

 

19,568

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from employee stock plans

 

 

2,880

 

 

 

3,075

 

Taxes paid related to net share settlement of equity awards

 

 

(293

)

 

 

(841

)

Proceeds from issuance of Term Loan, net

 

 

38,829

 

 

 

 

Proceeds from issuance of Convertible Notes, net

 

 

27,282

 

 

 

 

Payments made to note holders

 

 

(69,797

)

 

 

(43,658

)

Borrowings (repayments) under Revolving Credit Facility, net

 

 

(23,541

)

 

 

 

Net cash used in financing activities

 

 

(24,640

)

 

 

(41,424

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

2,533

 

 

 

(2,349

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(12,325

)

 

 

(47,724

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

85,235

 

 

 

122,133

 

Cash, cash equivalents and restricted cash at end of period

 

$

72,910

 

 

$

74,409

 

 

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

5


 

Accuray Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1. The Company and its Significant Accounting Policies

The Company

 

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

 

Basis of Presentation

 

The unaudited 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 unaudited 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. Certain amounts in the prior year’s condensed consolidated balance sheet and condensed consolidated statement of cash flows have been reclassified to conform to the current period’s presentation. The results for the three and nine months ended March 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2018, or for any other future interim period or fiscal year.

These unaudited 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, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 25, 2017.

Significant Accounting Policies

 

There have been no material changes to the Company’s accounting policies from the information provided in Note 2. Summary of Significant Accounting Policies to the audited condensed consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017.

 

Note 2. Recent Accounting Pronouncements

Accounting Pronouncement Recently Adopted

 

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (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. In addition, the guidance provides an option to recognize forfeitures as they occur versus estimating them at the time of grant. The amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU No. 2016-09 as required in the first quarter of fiscal year 2018 and has elected to continue the use of its forfeiture estimation method for share-based payment awards. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

6


 

Accounting Pronouncements Not Yet Effective

 

In February 2018, the FASB issued ASU No. 2018-2, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows companies to reclassify from Accumulated Other Comprehensive Income to Retained Earnings stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "Tax Act"). The guidance will be effective for the Company in its first quarter of fiscal year 2020. Early adoption is permitted. The guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company has not yet selected a transition method, has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging. This guidance simplifies the application and administration of hedge accounting. The guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The guidance is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance will be effective for the Company in its first quarter of fiscal year 2020. Early adoption is permitted. The guidance is required to be adopted on a prospective basis. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting. This guidance redefines which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting for a share-based payment. This guidance will be effective for the Company in the first quarter of its fiscal year 2019. The guidance is required to be adopted on a prospective basis. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715)—Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance revises the presentation of employer-sponsored defined benefit pension and other postretirement plans for the net periodic benefit cost in the statement of operations and requires that the service cost component of net periodic benefit be presented in the same income statement line items as other employee compensation costs for services rendered during the period. The other components of the net benefit costs are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. This guidance allows only the service cost component of net periodic benefit costs to be eligible for capitalization. The guidance will be effective for the Company in the first quarter of its fiscal year 2019 and is required to be adopted on a retrospective basis. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other Topics (Topic 350)-Simplifying the Test for Goodwill Impairment. This guidance simplifies the measurement of goodwill by eliminating the Step 2 impairment test. The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This guidance will be effective for the Company beginning in its first quarter of fiscal year 2021. The amendment is required to be adopted prospectively. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not believe the adoption of this standard will have a material impact on its 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, which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This guidance will be effective for the Company in the first quarter of its fiscal year 2019. The guidance is required to be adopted on a retrospective basis, unless it is impracticable whereby the guidance can be adopted on a prospective basis as of the earliest date practicable. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13 Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets held. This guidance 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 consolidated financial statements and related disclosures.

 

7


 

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 guidance will be effective for the Company in the first quarter of its fiscal year 2020 and early adoption is permitted. The guidance requires adoption based upon a modified retrospective transition approach. However, the FASB has recently proposed guidance that would permit companies not to restate periods priors to adoption. The Company has not yet selected a transition method, has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). This ASU changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The guidance will be effective for the Company beginning in the first quarter of fiscal year 2019 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted for certain provisions. The Company is currently evaluating the impact of the adoption of this standard on its 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 revenue 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. The guidance will be effective for the Company in the first quarter of its fiscal year 2019. The Company intends to adopt the new standard in the first quarter of fiscal year 2019 using the modified retrospective method. Based upon a preliminary assessment, the Company expects certain portions of its product revenue could be accelerated to reflect transfer of control upon delivery and an element of installation will be deferred until performed. The revenue recognition method for indirect sales and service revenues is expected to be unchanged under the new guidance. The Company also expects to capitalize incremental contract acquisition costs, such as sales commissions, and amortize over the economic life of its product or contractual relationship with the customer. The Company’s current practice is to defer sales commissions until revenue is recognized. The Company currently does not expect the application of this guidance to have a significant impact on its consolidated financial statements; however, the Company’s assessment may change as it continues its evaluation and analysis of this ASU.

 

Note 3. Supplemental Financial Information

 

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 sales-type leases, totaled $8.2 million and $7.4 million at March 31, 2018 and June 30, 2017, respectively, and are included in other assets in the unaudited condensed consolidated balance sheets. 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 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. 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-payment. As of March 31, 2018, 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 March 31, 2018 and June 30, 2017. Based upon such assessment, the Company did not record any adjustment and recorded $0.04 million to the allowance for credit losses related to such financing receivables as of March 31, 2018 and as of June 30, 2017, respectively.

8


 

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

 

March 31, 2018

 

Lease

Receivables

 

 

Financed

Service Contracts

and Other

 

 

Total

 

Gross

 

$

3,332

 

 

$

7,888

 

 

$

11,220

 

Unearned income

 

 

(301

)

 

 

 

 

 

(301

)

Allowance for credit loss

 

 

 

 

 

 

 

 

 

Total, net

 

$

3,031

 

 

$

7,888

 

 

$

10,919

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

789

 

 

$

1,927

 

 

 

2,716

 

Non-current

 

 

2,242

 

 

 

5,961

 

 

 

8,203

 

Total, net

 

$

3,031

 

 

$

7,888

 

 

$

10,919

 

 

June 30, 2017

 

Lease

Receivables

 

 

Financed

Service Contracts

and Other

 

 

Total

 

Gross

 

$

4,030

 

 

$

6,268

 

 

$

10,298

 

Unearned income

 

 

(433

)

 

 

 

 

 

(433

)

Allowance for credit loss

 

 

(39

)

 

 

 

 

 

(39

)

Total, net

 

$

3,558

 

 

$

6,268

 

 

$

9,826

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

$

720

 

 

$

1,677

 

 

$

2,397

 

Non-current

 

 

2,838

 

 

 

4,591

 

 

 

7,429

 

Total, net

 

$

3,558

 

 

$

6,268

 

 

$

9,826

 

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 March 31, 2018 are presented as follows (in thousands):

 

Year Ending June 30,

 

Amount

 

2018 (remaining 3 months)

 

$

232

 

2019

 

 

930

 

2020

 

 

930

 

2021

 

 

930

 

2022

 

 

310

 

Total

 

$

3,332

 

 

Inventories

Inventories consisted of the following (in thousands):

 

 

 

March 31,

2018

 

 

June 30,

2017

 

Raw materials

 

$

43,683

 

 

$

38,803

 

Work-in-process

 

 

18,622

 

 

 

15,471

 

Finished goods

 

 

53,595

 

 

 

50,780

 

Inventories

 

$

115,900

 

 

$

105,054

 

 

9


 

Property and equipment, net

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

 

 

 

March 31,

2018

 

 

June 30,

2017

 

Furniture and fixtures

 

$

2,961

 

 

$

4,364

 

Computer and office equipment

 

 

11,293

 

 

 

11,802

 

Software

 

 

11,314

 

 

 

11,457

 

Leasehold improvements

 

 

23,351

 

 

 

23,164

 

Machinery and equipment

 

 

46,904

 

 

 

48,742

 

Construction in progress

 

 

6,924

 

 

 

3,533

 

 

 

 

102,747

 

 

 

103,062

 

Less: Accumulated depreciation

 

 

(78,285

)

 

 

(80,000

)

Property and equipment, net

 

$

24,462

 

 

$

23,062

 

Depreciation expense related to property and equipment for the three and nine months ended March 31, 2018 was $2.3 million and $7.3 million, respectively. Depreciation expense related to property and equipment for the three and nine months ended March 31, 2017 was $2.6 million and $7.9 million, respectively.

Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) are excluded from earnings and reported as a component of stockholders’ equity. The foreign currency translation adjustment results from those subsidiaries not using the U.S. 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 to the U.S. Dollar at the current exchange rates at the end of each period. Revenues and expenses are translated at average exchange rates in effect during the period.

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

 

 

 

March 31,

2018

 

 

June 30,

2017

 

Net unrealized gain (loss) on short-term investments

 

$

354

 

 

$

(89

)

Cumulative foreign currency translation adjustment

 

 

2,621

 

 

 

1,154

 

Defined benefit pension obligation

 

 

(1,117

)

 

 

(1,117

)

Accumulated other comprehensive income (loss)

 

$

1,858

 

 

$

(52

)

 

Note 4. Goodwill and Intangible Assets

Goodwill

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

 

 

 

March 31,

2018

 

 

June 30,

2017

 

Balance at the beginning of the period

 

$

57,812

 

 

$

57,848

 

Currency translation

 

 

209

 

 

 

(36

)

Balance at the end of the period

 

$

58,021

 

 

$

57,812

 

 

In the second quarter of fiscal 2018, 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.

10


 

Intangible Assets

The Company’s carrying amount of acquired intangible assets, net, is as follows (in thousands):

 

 

 

 

 

March 31, 2018

 

 

June 30, 2017

 

 

 

Useful Lives

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Amount

 

 

 

(in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patent license

 

7

 

$

1,000

 

 

$

(143

)

 

$

857

 

 

$

1,000

 

 

$

(36

)

 

$

964

 

 

The Company did not identify any triggering events that would indicate potential impairment of its definite-lived intangible and long-lived assets as of March 31, 2018 and June 30, 2017.

Amortization expense related to intangible assets for the three and nine months ended March 31, 2018 was $0.04 million and $0.11 million, respectively. Amortization expense related to intangible assets for the three and nine months ended March 31, 2017 was $2.0 million and $6.0 million, respectively.

The estimated future amortization expense of acquired intangible assets as of March 31, 2018 is as follows (in thousands):

 

Year Ending June 30,

 

Amount

 

2018 (remaining 3 months)

 

$

36

 

2019

 

 

143

 

2020

 

 

143

 

2021

 

 

143

 

2022

 

 

143

 

Thereafter

 

 

249

 

 

 

$

857

 

 

Note 5. Investments

 

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.

 

In January 2018, the Company sold all of its available-for-sale investments for proceeds of $23.9 million and realized an insignificant loss on the sale of its investments.   The Company reviews its investments quarterly to identify and evaluate investments that have an indication of possible impairment. Gross realized gains and losses were insignificant for the nine months ended March 31, 2018 and the year ended June 30, 2017. Upon the sale of its available for sale securities, the Company reclassified $77 thousand from other comprehensive income to Other expense, net.

 

The Company has an investment in a technology company, which has historically been accounted for using the cost method and recorded in Other assets. Subsequent to such company’s initial public offering in October 2017, the Company owns approximately 143,000 shares of such company’s common stock. These shares are subject to a 6-month lock-up period that expired in April 2018. As of March 31, 2018, these shares have a fair value of $0.9 million. Considering the recent liquidity in these shares, the Company reclassified its investment from Other assets to short-term investments, recording an unrealized gain of $0.3 million through other comprehensive income at March 31, 2018. The Company considers the tax effect on the gain to be immaterial.

 

11


 

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

 

March 31, 2018

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

U. S. government agency securities (*)

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency securities

 

$

(31

)

 

$

11,970

 

 

$

(58

)

 

$

11,939

 

 

$

(89

)

 

$

23,909

 

 

(*)

There was no positions as of March 31, 2018

 

Note 6. Derivative Financial Instruments

The Company manages some of its foreign currency risk through the purchase of foreign currency forward contracts that hedge against the short-term effect of currency fluctuations. These foreign currency forward contracts have a monthly maturity that mitigates the effect of rate fluctuations on certain local currency denominated intercompany balances, 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. There were no outstanding foreign currency forward contracts at the end of March 31, 2018 and June 30, 2017.

The following table provides information about gains (losses) associated with the Company’s derivative financial instruments (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Foreign currency exchange gain (loss) on foreign contracts

 

$

726

 

 

$

225

 

 

$

(1,712

)

 

$

(942

)

Foreign currency transactions gain (loss)

 

 

(1,047

)

 

 

(44

)

 

 

1,477

 

 

 

40

 

 

Note 7. Fair Value Measurements

Fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability 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.

12


 

The Company’s Level 1 assets include institutional money-market funds that are classified as cash equivalents, which are valued primarily using quoted market prices in active markets for identical assets. The Company’s Level 2 assets include its U.S. government agency securities and its corporate securities as the market inputs used to value these instruments consist of market yields, reported trades and broker/dealer quotes, which are corroborated with observable market data. The tables below set forth, by level, the Company’s financial assets that were accounted for at fair value (in thousands):

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Cash and

Cash

Equivalents

 

 

Short-term

Investments

 

Cash

 

$

70,392

 

 

$

 

 

$

 

 

$

70,392

 

 

$

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

 

533

 

 

 

355

 

 

 

 

 

 

 

 

 

 

 

888

 

Total

 

$

70,925

 

 

$

355

 

 

$

 

 

$

70,392

 

 

$

888

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Cash and

Cash

Equivalents

 

 

Short-term

Investments

 

Cash

 

$

70,515

 

 

$

 

 

$

 

 

$

70,515

 

 

$

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

1,569

 

 

 

 

 

 

 

 

 

1,569

 

 

 

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities

 

 

23,998

 

 

 

 

 

 

(89

)

 

 

 

 

 

23,909

 

Total

 

$

96,082

 

 

$

 

 

$

(89

)

 

$

72,084

 

 

$

23,909

 

 

Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

The Company’s debt is 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 3.50% Convertible Notes (as defined below), the 3.50% Series A Convertible Notes (as defined below) and the 3.75% Convertible Notes (as defined below) (collectively the “Notes”) are not readily available. The carrying value of the Revolving Credit Facility (as defined below) and the Term Loan (as defined below) (collectively the “Credit Facilities”, together with the Notes, “Debt”) approximate its estimated fair value as these borrowings have a variable rate structure that is based on a market observable interest rate that resets periodically. The Credit Facilities are classified as Level 2 within the fair value hierarchy.

The following table summarizes the carrying value and estimated fair value of all Debt (in thousands):

 

 

 

March 31, 2018

 

 

June 30, 2017

 

 

 

Carrying

Value

 

 

Fair

Value

 

 

Carrying

Value

 

 

Fair

Value

 

3.50% Convertible Notes

 

$

 

 

$

 

 

$

44,099

 

 

$

48,146

 

3.50% Series A Convertible Notes

 

 

 

 

 

 

 

 

68,924