ACCURAY INC - Quarter Report: 2012 December (Form 10-Q)

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, 2012

 

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)

 

 

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 (§ 229.405 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):

 

 

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 25, 2013, there were 73,926,393 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, 2012

 

Table of Contents

 

		Page No.
PART I.	Financial Information	3
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of December 31, 2012 and June 30, 2012	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended December 31, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II.	Other Information	26
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		34

 

2

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.   Condensed Consolidated Financial Statements

 

Accuray Incorporated

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

		December 31, 2012			June 30, 2012 (1)
Assets
Current assets:
Cash and cash equivalents		$	94,773		$	143,504
Restricted cash		2,657			1,560
Accounts receivable, net of allowance for doubtful accounts of $1,327 and $1,700, respectively		63,468			67,890
Inventories		88,830			81,693
Prepaid expenses and other current assets		14,766			16,715
Deferred cost of revenue - current		7,509			4,896
Total current assets		272,003			316,258
Property and equipment, net		37,209			37,458
Goodwill		59,389			59,215
Intangible assets, net		36,317			49,819
Deferred cost of revenue - noncurrent		2,760			2,433
Other assets		7,957			7,987
Total assets		$	415,635		$	473,170
Liabilities and equity
Current liabilities:
Accounts payable		$	20,668		$	18,209
Accrued compensation		12,809			23,071
Other accrued liabilities		28,657			31,646
Customer advances - current		18,576			18,177
Deferred revenue - current		87,272			83,071
Total current liabilities		167,982			174,174
Long-term liabilities:
Long-term other liabilities		5,293			5,988
Deferred revenue - noncurrent		9,968			9,675
Long-term debt		81,565			79,466
Total liabilities		264,808			269,303
Commitment and contingencies (Note 5)
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 and 100,000,000 shares; issued and outstanding: 73,920,824 and 71,864,268 shares at December 31 and June 30, 2012, respectively		74			72
Additional paid-in capital		418,008			409,143
Accumulated other comprehensive income		2,473			2,837
Accumulated deficit		(269,728		)	(216,427		)
Total stockholders’ equity		150,827			195,625
Non-controlling interest		—			8,242
Total equity		150,827			203,867
Total liabilities and equity		$	415,635		$	473,170

 

(1) The condensed consolidated balance sheet at June 30, 2012 has been derived from audited consolidated financial statements.

 

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

 

3

Table of Contents

 

Accuray Incorporated

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2012			2011			2012			2011
Net revenue:
Products		$	33,170		$	63,802		$	73,798		$	119,976
Services		44,609			42,097			86,729			85,498
Other		—			524			—			1,400
Total net revenue		77,779			106,423			160,527			206,874
Cost of revenue:
Cost of products		18,564			32,800			42,573			71,173
Cost of services		32,589			33,177			67,652			70,526
Cost of other		—			203			—			504
Total cost of revenue		51,153			66,180			110,225			142,203
Gross profit		26,626			40,243			50,302			64,671
Operating expenses:
Selling and marketing		15,761			14,017			28,650			27,598
Research and development		17,239			18,283			35,813			37,401
General and administrative		15,892			13,395			28,734			28,083
Total operating expenses		48,892			45,695			93,197			93,082
Loss from operations		(22,266		)	(5,452		)	(42,895		)	(28,411		)
Other expense, net		(2,580		)	(4,464		)	(3,284		)	(7,236		)
Loss before provision for income taxes		(24,846		)	(9,916		)	(46,179		)	(35,647		)
Provision for income taxes		667			367			1,264			905
Loss from continuing operations		(25,513		)	(10,283		)	(47,443		)	(36,552		)
Loss from discontinued operations (Note 9):
Loss from operations of a discontinued variable interest entity		(1,400		)	(1,908		)	(3,505		)	(3,722		)
Impairment of indefinite lived intangible asset of discontinued variable interest entity		—			—			(12,200		)	—
Loss from deconsolidation of a variable interest entity		(3,442		)	—			(3,442		)	—
Loss from discontinued operations, net of tax of $0		(4,842		)	(1,908		)	(19,147		)	(3,722		)
Loss from discontinued operations attributable to non-controlling interest		(1,184		)	(1,804		)	(13,289		)	(3,377		)
Loss from discontinued operations attributable to stockholders		(3,658		)	(104		)	(5,858		)	(345		)
Net loss attributable to stockholders		$	(29,171	)	$	(10,387	)	$	(53,301	)	$	(36,897	)
Loss per share attributable to stockholders
Basic and diluted - continuing operations		$	(0.35	)	$	(0.15	)	$	(0.65	)	$	(0.52	)
Basic and diluted - discontinued operations		$	(0.05	)	$	—		$	(0.09	)	$	—
Basic and diluted - net loss		$	(0.40	)	$	(0.15	)	$	(0.74	)	$	(0.52	)
Weighted average common shares used in computing loss per share
Basic and diluted		72,870			70,698			72,433			70,481
Net loss attributable to stockholders		$	(29,171	)	$	(10,387	)	$	(53,301	)	$	(36,897	)
Foreign currency translation adjustment		171			1,532			(364		)	2,367
Comprehensive loss		$	(29,000	)	$	(8,855	)	$	(53,665	)	$	(34,530	)

 

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

 

4

Table of Contents

 

Accuray Incorporated

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Six Months Ended December 31,
		2012			2011
Cash Flows From Operating Activities
Loss from continuing operations		$	(47,443	)	$	(36,552	)
Loss from discontinued operations		(19,147		)	(3,722		)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization		13,920			16,521
Impairment of indefinite lived intangible asset		12,200			—
Share-based compensation		4,051			4,556
Accretion of interest on long-term debt		2,099			1,597
Provision for (recovery of) bad debt		(373		)	1,342
Provision for write-down of inventories		408			1,020
Loss on disposal of property and equipment		391			166
Gain on previously held equity interest in Morphormics		(662		)	—
Loss from deconsolidation of a variable interest entity		3,442			—
Changes in assets and liabilities:
Restricted cash		(1,050		)	(335		)
Accounts receivable		5,415			(15,036		)
Inventories		(7,308		)	12,104
Prepaid expenses and other assets		2,096			7,703
Deferred cost of revenue		(2,951		)	(1,751		)
Accounts payable		3,335			(16,974		)
Accrued liabilities		(13,871		)	(23,800		)
Customer advances		49			(2,460		)
Deferred revenue		3,588			17,204
Net cash used in operating activities		(41,811		)	(38,417		)
Cash Flows From Investing Activities
Purchases of property and equipment, net		(9,207		)	(3,900		)
Purchase of intangible asset		(232		)	—
Acquisition of business, net of cash acquired		(3,861		)	(1,384		)
Net cash used in investing activities		(13,300		)	(5,284		)
Cash Flows From Financing Activities
Proceeds from issuance of common stock		5,147			2,030
Proceeds from debt, net of costs		—			96,100
Net cash provided by financing activities		5,147			98,130
Effect of exchange rate changes on cash and cash equivalents		1,233			(1,868		)
Net increase (decrease) in cash and cash equivalents		(48,731		)	52,561
Cash and cash equivalents at beginning of period		143,504			95,906
Cash and cash equivalents at end of period		$	94,773		$	148,467

 

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

 

5

Table of Contents

 

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”) is incorporated in Delaware. The Company designs, develops and sells advanced radiosurgery and radiation therapy systems for the treatment of tumors throughout the body.

 

Basis of Presentation and Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a variable interest entity, Compact Particle Acceleration Corporation (“CPAC”) until its deconsolidation on December 21, 2012 (for further information, see “Note 9, Investment in CPAC”). 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, 2012 are not necessarily indicative of the results to be expected for the year ending June 30, 2013, for any other interim period or for any future year.

 

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, business combinations and intangible asset impairment, inventories, share-based compensation expense, income taxes, loss contingencies and corporate bonus expenses and accruals. Actual results could differ materially from those estimates.

 

Concentration of Credit and Other Risks

 

The Company’s cash and cash equivalents are mainly deposited with several major financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances.

 

For the three and six months ended December 31, 2012 and 2011, there were no customers that represented 10% or more of total net revenue. At December 31, 2012 and June 30, 2012, there was one customer and two customers, respectively, whose accounts receivable balances were 10% or more of the Company’s total accounts receivable.

 

Accounts receivable are typically not collateralized. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts are charged against the allowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within management’s expectations.

 

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 for these components subject to any regulatory qualifications, if required.

 

Revenue Recognition

 

The Company earns revenue from the sale of products, the operation of its shared ownership program, and the provision of related services, which include post-contract customer support (“PCS”), installation services, training and other professional services. The Company records its revenues net of any value added or sales tax. For arrangements with multiple elements, the Company allocates arrangement fees to product and services based upon Vendor Specific Objective Evidence of fair value of the respective elements, or Third-Party Evidence, or Best Estimate of Selling Price using the relative selling price method.

 

6

Table of Contents

 

Product Revenue

 

The majority of product revenue is normally generated from sales of CyberKnife and TomoTherapy systems. The Company sells its systems with PCS contracts, installation services, training, and at times, professional services. PCS contracts provide planned and corrective maintenance services, software updates, bug fixes, as well as call-center support. If the Company is responsible for installation, the Company recognizes revenue after installation and acceptance of the system. Otherwise, revenue is recognized upon delivery.

 

Service Revenue

 

Service revenue is generated primarily from PCS (warranty period services and post warranty services), installation services, training, and professional services. PCS revenue is deferred and recognized over the service period. Installation service revenue is recognized concurrent 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 system upgrades where revenue recognition has been deferred. In those cases, the costs are deferred and are recognized over the period of revenue recognition.

 

Shared ownership program

 

The Company also enters into arrangements under its shared ownership program with certain customers. These arrangements typically have a term of five years and provide the customer an option to purchase the system during the contractual term at pre-determined prices. Under the terms of this program, the Company retains title to its system, while the customer has use of the system. The Company generally receives a minimum monthly payment and earns additional revenues from the customer based upon its use of the system which are included in product revenue in the condensed consolidated statements of operations and comprehensive loss.

 

Other revenue

 

Other revenue primarily consists of research and development and construction contract revenues.

 

Long-term construction and manufacturing contracts

 

The Company recognizes revenue and cost of revenue related to long-term construction and manufacturing contracts using contract accounting on the percentage-of-completion or the completed contract method. The Company records such revenue under other revenue and cost of such revenue under cost of other revenue in the condensed consolidated statements of operations and comprehensive loss. Any loss provision identified from the total contract in the period is recorded as an increase to cost of revenue.

 

Loss Per Share

 

Basic and diluted loss per share is computed by dividing loss attributable to stockholders by the weighted average number of common shares outstanding during the period. The potential dilutive shares of the Company’s common stock resulting from the assumed exercise of outstanding stock options, the vesting of Restricted Stock Units (RSUs), Market Stock Units (MSUs) and Performance-based Stock Units (PSUs), and the purchase of shares under the Employee Stock Purchase Plan (ESPP), as determined under the treasury stock method, are excluded from the computation of diluted loss per share because their effect would have been anti-dilutive.

 

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

 

		Three Months Ended December 31,						Six Months Ended December 31,
		2012			2011			2012			2011
Numerator:
Loss from operations used in computing loss per share from continuing operations		$	(25,513	)	$	(10,283	)	$	(47,443	)	$	(36,552	)
Loss from discontinued operations used in computing loss per share from discontinued operations		$	(3,658	)	$	(104	)	$	(5,858	)	$	(345	)
Net loss used in computing net loss per share		$	(29,171	)	$	(10,387	)	$	(53,301	)	$	(36,897	)
Denominator:
Weighted average shares used in computing basic loss per share		72,870			70,698			72,433			70,481
Add: Dilutive stock options and awards outstanding		—			—			—			—
Weighted average shares used in computing diluted loss per share		72,870			70,698			72,433			70,481

 

7

Table of Contents

 

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,
		2012		2011
Stock options		6,911		8,115
RSUs, MSUs and PSUs		2,581		2,105
3.75% Convertible Notes		10,560		10,560
		20,052		20,780

 

The 3.75% Convertible Senior Notes due August 1, 2016 (the “3.75% Convertible Notes”) are included in the calculation of diluted loss per share if their inclusion is dilutive under the if-converted method.

 

Segment Information

 

The Company has determined that it operates in only one segment, as it only reports profit and loss information on an aggregate basis to its chief operating decision maker. The Company’s long-lived assets maintained outside the United States are not material. 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,
		2012			2011			2012			2011
Americas		$	35,079		$	54,262		$	70,890		$	103,111
Europe, Middle East, India and Africa		27,838			25,330			52,956			53,945
Asia (excluding Japan)		5,537			19,715			20,658			35,872
Japan		9,325			7,116			16,023			13,946
Total		$	77,779		$	106,423		$	160,527		$	206,874

 

2. Balance Sheet Components

 

Accounts receivable, net

 

Accounts receivable, net consisted of the following (in thousands):

 

		December 31,			June 30,
		2012			2012
Accounts receivable		$	64,422		$	69,285
Unbilled fees and services		373			305
		64,795			69,590
Less: Allowance for doubtful accounts		(1,327		)	(1,700		)
Accounts receivable, net		$	63,468		$	67,890

 

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 creditor’s balance sheet. The Company’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year totaled $2.9 million and $2.5 million at December 31, 2012 and June 30, 2012, respectively and are included in Other Assets in the condensed consolidated balance sheets. There was no balance in the allowance for doubtful financing receivable accounts related to financing receivables as of December 31, 2012 and June 30, 2012.

 

8

Table of Contents

 

Inventories

 

Inventories consisted of the following (in thousands):

 

		December 31,			June 30,
		2012			2012
Raw materials		$	38,071		$	34,579
Work-in-process		21,644			16,547
Finished goods		29,115			30,567
Inventories		$	88,830		$	81,693

 

Property and equipment, net

 

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

 

		December 31,			June 30,
		2012			2012
Furniture and fixtures		$	6,515		$	5,921
Computer and office equipment		9,520			9,126
Software		9,445			9,429
Leasehold improvements		16,842			16,065
Machinery and equipment		31,843			33,493
Shared ownership systems		4,979			4,979
Construction in progress		7,928			3,787
		87,072			82,800
Less: Accumulated depreciation		(49,863		)	(45,342		)
Property and equipment, net		$	37,209		$	37,458

 

Depreciation expense related to property and equipment for the three and six months ended December 31, 2012 was $3.9 million and $8.0 million, respectively. Depreciation expense related to property and equipment for the three and six months ended December 31, 2011 was $4.1 million and $8.3 million, respectively.

 

3. Goodwill and Intangible Assets

 

Goodwill

 

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

 

		Six Months
		Ended			Year Ended
		December 31,			June 30,
		2012			2012
Balance at the beginning of the period		$	59,215		$	54,474
Addition related to acquisition		77			—
Currency translation and other adjustments		97			—
Adjustments related to prior year acquisition (1)		—			4,741
Balance at the end of the period		$	59,389		$	59,215

 

(1)  Primarily represents liabilities related to the TomoTherapy acquisition.

 

9

Table of Contents

 

Intangible Assets

 

The Company’s intangible assets associated with completed acquisitions at December 31, 2012 and June 30, 2012 are as follows (in thousands):

 

				December 31, 2012									June 30, 2012
				Gross									Gross
				Carrying			Accumulated			Net			Carrying			Accumulated			Net
		Useful Lives		Amount			Amortization			Amount			Amount			Amortization			Amount
		(in years)
Developed technology		5 - 6		$	48,556		$	(13,107	)	$	35,449		$	43,455		$	(9,161	)	$	34,294
Backlog		1.25		10,500			(10,500		)	—			10,500			(8,867		)	1,633
Distributor license		1.5 - 2.5		2,070			(1,202		)	868			1,860			(768		)	1,092
In-process research and development (CPAC)		Indefinite		—			—			—			12,800			—			12,800
				$	61,126		$	(24,809	)	$	36,317		$	68,615		$	(18,796	)	$	49,819

 

Prior to the deconsolidation of CPAC on December 21, 2012 (see Note 9), the Company had noted certain impairment triggers based on results of research and development work carried out by CPAC. As a result, based on projected future usage of the in-process research and development (“IPR&D”) technology by CPAC, an impairment charge of $12.2 million was recorded during the three months ended September 30, 2012.  The Company did not identify any impairment triggers on goodwill or any of its other definite-lived intangible and long-lived assets.

 

Amortization expense related to intangible assets for the three and six months ended December 31, 2012 was $2.2 million and $6.0 million, respectively. Amortization expense related to intangible assets for the three and six months ended December 31, 2011 was $4.1 million and $8.2 million, respectively.

 

The estimated future amortization expense of purchased intangible assets as of December 31, 2012 is as follows (in thousands):

 

Year Ending June 30,		Amount
2013 (remaining 6 months)		$	4,412
2014		8,388
2015		7,953
2016		7,953
2017		7,568
Thereafter		43
		$	36,317

 

4. Financial Instruments

 

The following tables summarize the fair value of financial instruments measured on a recurring basis as of December 31, 2012 and June 30, 2012 (in thousands):

 

		Fair value measurement using
Type of instrument and line item in condensed consolidated balance sheets		Quoted Prices in Active Markets for Identical Instruments (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total balance
Assets at December 31, 2012
Money market funds - included in cash and cash equivalents		$	20,086		$	—		$	—		$	20,086
Certificate of deposits - included in cash and cash equivalents		$	9,139		$	—		$	—		$	9,139
Assets at June 30, 2012
Money market funds - included in cash and cash equivalents		$	40,068		$	—		$	—		$	40,068
Certificate of deposits - included in cash and cash equivalents		$	6,742		$	—		$	—		$	6,742

 

10

Table of Contents

 

The following tables summarize the fair value of financial instruments that are not measured on a recurring basis as of December 31, 2012 and June 30, 2012 (in thousands):

 

		Fair value measurement using
Type of instrument and line item in condensed consolidated balance sheets		Quoted Prices in Active Markets for Identical Instruments (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total balance
At December 31, 2012
Long-term debt		$	—		$	100,400		$	—		$	100,400
At June 30, 2012
Long-term debt		$	—		$	101,400		$	—		$	101,400

 

The long-term 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 3.75% Convertible Notes is not readily available.

 

5. Contingencies

 

Litigation

 

From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. Currently, management believes the Company does not have any probable and estimable loss related to any current legal proceedings and claims that would individually or in the aggregate materially adversely affect its 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 which could have a material impact on its results of operations, financial position and cash flows.

 

Best Medical Trade Secret Litigation

 

On September 3, 2009, Best Medical International, Inc. (“Best Medical”) filed a lawsuit against the Company in the U.S. District Court for the Western District of Pennsylvania, claiming that the Company induced certain individuals to leave the employment of Best Medical and join the Company in order to gain access to Best Medical’s confidential information and trade secrets. Best Medical is seeking monetary damages and other relief. The Company filed a motion for summary judgment on May 20, 2011, Best Medical filed its response on June 21, 2011, and the Company filed a response to their response on July 8, 2011. On October 25, 2011, the court granted summary judgment in favor of the Company on all counts. On November 21, 2011 Best Medical filed a notice of appeal, and the parties await a ruling by the appellate court. At this time, the Company does not have enough information to estimate what, if any, financial impact this claim will have.

 

Best Medical Patent Litigation

 

On August 6, 2010, Best Medical filed an additional lawsuit against the Company in the U.S. District Court for the Western District of Pennsylvania, claiming that the Company has infringed U.S. Patent No. 5,596,619, a patent that Best Medical alleges protects a method and apparatus for conformal radiation therapy. On December 2, 2010, the Court granted the Company’s motion to dismiss, with leave to amend. On December 16, 2010, Best Medical filed an amended complaint, claiming that the Company also infringed U.S. Patent Nos. 6,038,283 and 7,266,175, both of which Best Medical alleges cover methods and apparatus for conformal radiation therapy. On March 9, 2011, the Court dismissed with prejudice all counts against the Company, except for two counts of alleged willful infringement of two of the patents. The Court issued a Scheduling Order on May 12, 2011 appointing a special master for claim construction, and setting a claim construction hearing on January 10, 2012. Best Medical moved to voluntarily dismiss one of the two remaining patent claims on June 28, 2011, which the court granted on June 30, 2011, leaving only one patent (U.S. Patent No. 6,038,283) at issue in the case. The Court held a claim construction hearing on May 16, 2012. On January 10, 2013, the Court issued the claim construction order and a mandatory mediation will occur in March 2013. Best Medical is seeking declaratory and injunctive relief, as well as unspecified compensatory and treble damages and other relief. At this time, the Company does not have enough information to estimate what, if any, financial impact this claim will have.

 

Rotary Systems

 

On April 28, 2011, a former supplier to TomoTherapy, Rotary Systems Incorporated, filed suit in Minnesota state court, Tenth Judicial District, Anoka County, against TomoTherapy alleging misappropriation of trade secrets, as well as several other counts alleging various theories of injury. Rotary Systems alleges TomoTherapy misappropriated Rotary Systems’ trade secrets pertaining to a component previously purchased from Rotary Systems, which component TomoTherapy now purchases from a different supplier. The suit alleges TomoTherapy improperly supplied the alleged trade secrets to its present supplier, Dynamic Sealing Technologies Inc. (also a named defendant in the suit). Rotary Systems has made an unspecified claim for damages of greater than $50,000. TomoTherapy moved to dismiss the case on May 19, 2011,

 

11

Table of Contents

 

and on August 29, 2011, the court granted the motion to dismiss with respect to all counts other than the count alleging misappropriation of trade secrets. On May 21, 2012, the court granted the Company’s motion for sanctions, in part, and gave Rotary Systems sixty days to identify the alleged trade secrets with specificity or face dismissal of its claim with prejudice. The court held a hearing on September 20, 2012 to review Rotary System’s amended complaint and set a calendar for discovery. At this time, the Company does not have enough information to estimate what, if any, financial impact this claim will have.

 

Radiation Stabilization Solutions Patent Litigation

 

On September 15, 2011, Radiation Stabilization Solutions LLC (“RSS”) filed a patent infringement complaint in the United States District Court for the Northern District of Illinois, Eastern Division. The complaint, alleged the Company’s sale of the TomoHD product induces infringement of or contributorily infringes U.S. Patent No. 6,118,848, or the ‘848 Patent, and sought unspecified monetary damages for the alleged infringement. The complaint also named Varian Medical Systems, Inc., BrainLab AG, BrainLab, Inc., Elekta AB and Elekta, Inc. as defendants, alleging that certain of their products also infringe the ‘848 patent. On October 27, 2011, the Court dismissed the complaint without prejudice because non-resident defendants had been improperly named in the complaint.

 

On October 28, 2011, RSS filed a new complaint against the Company and a customer of the Company in the United States District Court for the Northern District of Illinois, Eastern Division. The new complaint repeats the original complaint’s allegations against the Company and seeks unspecified monetary damages for the alleged infringement. The complaint further alleges that the customer directly and indirectly infringes the ‘848 patent, and seeks unspecified monetary damages for the alleged infringement. RSS also filed individual suits against each of Varian and Elekta and several of their respective customers. RSS served the complaint on Accuray and its customer on December 7, 2011. On January 30, 2012 the Company filed a motion to dismiss the complaint, and the Court heard oral argument for the motion on June 29, 2012. On August 21, 2012, the court granted the Company’s motion in part and gave RSS leave to amend the complaint. On September 21, 2012, RSS filed an amended complaint. On November 2, 2012, the Company and RSS entered into a settlement agreement, under which the Company paid $150,000 to resolve all outstanding claims.

 

Accuray Securities Complaint

 

On November 1, 2012, a complaint was filed in Santa Clara County Superior Court purportedly on behalf of a class of shareholders seeking to enjoin the shareholder vote to be held at our annual meeting scheduled for November 30, 2012. The complaint named as defendants the Company and the members of the board of directors and alleged that the disclosures in the proxy statement for the annual meeting concerning the advisory vote on executive compensation and the proposal to amend the certificate of incorporation to increase the number of authorized shares are inadequate and constitute a breach of fiduciary duty. In addition to an injunction, the complaint sought unspecified monetary damages and other relief. The annual meeting was held on November 30, 2012. On December 28, 2012, the plaintiffs requested dismissal of the case from the court without prejudice, which was granted on January 3, 2013.

 

Sarif Biomedical Patent Litigation

 

On January 28, 2013 Sarif Biomedical filed a patent infringement complaint in the United States District Court for Delaware. The complaint alleges the Company’s CyberKnife system directly infringes U.S. Patent No. 5,755,725, or the ‘725 Patent, and seeks unspecified monetary damages for the alleged infringement. At this time, we do not have enough information to estimate what, if any, financial impact this claim will have.

 

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, 2012.

 

6. Acquisition

 

On July 16, 2012, the Company acquired the remaining 90% of the outstanding shares of Morphormics, Inc. (“Morphormics”), a privately-held developer of medical imaging software based in North Carolina. The purpose of this acquisition was to enable the Company to extend auto-contouring capabilities for both the CyberKnife and TomoTherapy systems to improve disease specific workflows. The Company previously held 10% of the outstanding shares of Morphormics which was carried at zero value prior to the acquisition and re-measured to its acquisition-date fair value of $0.7 million based on the fair value of the consideration transferred. The acquisition has been accounted for as a business combination using purchase accounting and Morphormics’ results of operations are included in the condensed consolidated financial

 

12

Table of Contents

 

statements from July 16, 2012. The acquisition was not considered a material business combination and was funded through cash on-hand. As per the acquisition agreement, $0.9 million of the purchase consideration is to be paid on April 16, 2013 and is included in other accrued liabilities in the condensed consolidated balance sheet at December 31, 2012. The Company has not incurred material severance or acquisition-related costs.

 

The fair value of total purchase consideration paid and payable for 100% of Morphormics’ equity interest as of the acquisition date was as follows (in thousands):

 

Cash paid and payable		$	5,385
Fair value of pre-existing investment in Morphormics		662
Total		$	6,047

 

The total purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows (in thousands):

 

Cash and cash equivalents		$	668
Accounts receivable		283
Other current assets		7
Amortizable intangible assets - developed technology		5,100
Goodwill		77
Accrued compensation		(88		)
Total purchase price		$	6,047

 

Pro forma results of operations for the acquisition have not been presented because they are not material to the Company’s condensed consolidated statements of operations and comprehensive loss, balance sheets, or cash flows.

 

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 December 31,						Six Months Ended December 31,
		2012			2011			2012			2011
Cost of revenue		$	319		$	437		$	566		$	995
Selling and marketing		327			151			547			380
Research and development		477			567			993			1,169
General and administrative		1,173			792			1,945			2,012
		$	2,296		$	1,947		$	4,051		$	4,556

 

At December 31, 2012 and June 30, 2012, capitalized share-based compensation expenses of $0.5 million and $0.4 million, respectively, were included as a component of inventories.

 

Performance-Based Awards

 

During fiscal 2012, the Compensation Committee of the Board of Directors of the Company approved the granting of PSUs to employees of the Company which vest only upon meeting certain financial performance criteria during the performance period commencing on the first day of the Company’s 2012 fiscal year and ending on the last day of the Company’s 2013 fiscal year. If the PSUs do not become vested as a result of the Company’s performance during the performance period, all PSUs are automatically forfeited by the participants effective as of the last day of the performance period. During fiscal 2012, approximately 1.0 million PSUs were granted to employees valued at approximately $3.9 million which was based on the fair value of the Company’s common stock on the grant date and will be recognized over the requisite performance period based on management’s assessment of the probability of achieving the performance criteria. Approximately 0.7 million PSUs are outstanding as of December 31, 2012.

 

As of December 31, 2012, management assessed that it was not probable that the performance criteria would be met during the performance period and accordingly, no compensation cost has been recognized for the PSUs to date or during the three months ended December 31, 2012. If in a future period management revises its assessment and concludes that it is probable that the performance criteria will be met, the Company will record a cumulative catch-up compensation charge for the PSUs in that period. Remaining compensation charges would be recognized ratably over the remaining performance period.

 

13

Table of Contents

 

Market Stock Unit (“MSU”) program

 

In October 2012, the Compensation Committee approved a new performance equity program, referred to as the market stock unit program (“MSU Program”). The program uses the Russell 2000 index as a performance benchmark and requires that the Company’s total stockholder return exceed that of the Russell 2000. Based on a sliding scale of how much the Russell 2000 benchmark is exceeded, participating executives can earn up to a maximum of 150% of the target number of shares over two measurement periods, one at the end of fiscal 2014 and another at the end of fiscal 2015. During the three months ended December 31, 2012, 0.2 million MSUs were granted to participating executives. The MSUs were valued at approximately $1.2 million based on a Monte-Carlo simulation on the grant date and will be recognized over a weighted average period of 2.1 years.

 

8. Debt

 

On August 1, 2011, the Company issued the 3.75% Convertible Notes to certain qualified institutional buyers or QIBs. The 3.75% Convertible Notes were offered and sold to the QIBs pursuant to Rule 144A under the Securities Act of 1933, as amended. The net proceeds from the $100 million offering, after deducting the initial purchaser’s discount and commission and the related offering costs, were approximately $96.1 million. The offering costs and the initial purchaser’s discount and commission (which are recorded in Other Assets) are both being amortized to interest expense using the effective interest method over five years. The 3.75% Convertible Notes bear interest at a rate of 3.75% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year, beginning on February 1, 2012. The 3.75% Convertible Notes will mature on August 1, 2016, unless earlier repurchased, redeemed or converted.

 

The 3.75% Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.75% Convertible Notes may convert their 3.75% Convertible Notes at any time on or after May 1, 2016 until the close of business on the business day immediately preceding the maturity date.  Prior to May 1, 2016, holders of the 3.75% Convertible Notes may convert their 3.75% Convertible Notes only under the following circumstances: (1) during any calendar quarter after the calendar quarter ending September 30, 2011, and only during such calendar quarter, if the closing sale price of the Company’s common stock for each of 20 or more trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading-day period (such five consecutive trading-day period, the “Note Measurement Period”) in which the trading price per $1,000 principal amount of 3.75% Convertible Notes for each trading day of 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 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 Notes, the Company will have the right to pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof, at the Company’s election. At any time on or prior to the 33rd business day immediately preceding the maturity date, the Company may irrevocably elect to (a) deliver solely shares of common stock of the Company in respect of the Company’s conversion obligation or (b) pay cash up to the aggregate principal amount of the 3.75% Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the 3.75% Convertible Notes being converted. The initial conversion rate is 105.5548 shares of the Company’s common stock per $1,000 principal amount of 3.75% Convertible Notes (which represents an initial conversion price of approximately $9.47 per share of the Company’s common stock). The conversion rate, and thus the conversion price, are subject to adjustment as further described below.

 

Holders of the 3.75% Convertible Notes who convert their 3.75% Convertible Notes in connection with a “make-whole fundamental change”, as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a fundamental change, as defined in the Indenture, holders of the 3.75% Convertible Notes may require the Company to purchase all or a portion of their 3.75% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of 3.75% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date.

 

On or after August 1, 2014 and prior to the maturity date, the Company may redeem for cash all or a portion of the 3.75% Convertible Notes if the closing sale price of its common stock exceeds 130% of the applicable conversion price (the initial conversion price is approximately $9.47 per share of common stock) of such 3.75% Convertible Notes for at least 20 trading days during any consecutive 30 trading-day period (including the last trading day of such period).

 

In accordance with Accounting Standards Codification (“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 Notes. The principal amount of the liability component of the 3.75% Convertible Notes was $75.9 million as of the date of issuance based on the present value of its cash flows using a discount rate of 10%, our approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity conversion component was $24.1 million. A portion of the initial purchaser’s discount and commission and the offering costs totaling $0.9 million was allocated to the equity conversion component. The liability component will be accreted to the principal amount of the 3.75% Convertible Notes using the effective interest method over five years.

 

14

Table of Contents

 

The following table presents the carrying value of the 3.75% Convertible Notes as of December 31, 2012 (in thousands):

 

Carrying amount of the equity conversion component		$	23,189
Principal amount of the 3.75% Convertible Notes		$	100,000
Unamortized debt discount (1)		(18,435		)
Net carrying amount		$	81,565

 

(1)As of December 31, 2012, the remaining period over which the unamortized debt discount will be amortized is 43 months.

 

A summary of interest expense and effective interest rate on the liability component related to the 3.75% Convertible Notes for the three and six months ended December 31, 2012 and 2011 was as follows (in thousands):

 

		Three months ended December 31,						Six months ended December 31,
		2012			2011			2012			2011
Effective interest rate		10.0		%	10.0		%	10.0		%	10.0		%
Interest expense related to contractual interest coupon		$	937		$	938		$	1,875		$	1,563
Interest expense related to amortization of debt discount		1,058			959			2,099			1,597
Total interest expense recognized		$	1,995		$	1,897		$	3,974		$	3,160

 

9. Investment in CPAC

 

On December 21, 2012, the Company and CPAC entered into a Purchase Agreement (the “Purchase Agreement”), whereby all the equity and debt investments held by the Company in CPAC were purchased by CPAC for a nominal consideration. Additionally, the Company assigned all its rights to the Dielectric Wall Accelerator (“DWA”) technology licensed from Lawrence Livermore National Security, LLC to CPAC. As a result of the Purchase Agreement, the Company has concluded that it is no longer the primary beneficiary of CPAC since it does not have any variable interests in that entity. Accordingly, the Company has deconsolidated CPAC and recorded a loss of $3.4 million during the three and six months ended December 31, 2012 due to the write-down of the carrying value of CPAC’s net liabilities, the write-off of the receivables from CPAC and the non-controlling interest in CPAC, net of cash consideration received. The results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded during the three and six months ended December 31, 2012 and 2011 have been disclosed as discontinued operations in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

10. Restructuring and Severance Charges

 

During December 2012, the Company vacated an office facility and recorded a charge of $1.4 million in general and administrative expenses during the three months ended December 31, 2012 for the remaining lease obligations on the facility, net of estimated sub-lease income. The Company also recorded a charge of $0.3 million in general and administrative expenses during the three months ended December 31, 2012 related to the disposition of certain fixed assets and leasehold improvements at this facility.

 

During the three months ended December 31, 2012, the Company also recorded severance related charges of $2.2 million in general and administrative expenses due to the departure of Dr. Euan S. Thomson (former Chief Executive Officer), Mr. Chris Raanes (former Chief Operating Officer) and certain other employees.

 

11. Subsequent Events

 

Restructuring

 

On January 3, 2013, the Company announced a restructuring of operations to focus on improving commercial execution and position the Company to support sustainable revenue growth and profitability. The restructuring reduced staffing by approximately 13 percent and was most heavily concentrated in the United States. As a result of the restructuring, the Company expects to record a charge of $3 million to $4 million, most of which will be recorded in the third quarter of fiscal 2013.

 

15

Table of Contents

 

Proposed Financing

 

On February 6, 2013, the Company announced its intention to engage in a financing pursuant to Rule 144A under the Securities Act of 1933, as amended.

 

16

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, 2012 and results of operations for the three and six months ended December 31, 2012 and 2011 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: expectations related to profitability and cash flows in fiscal 2013; sufficiency of cash resources and expected cash flows to fund future operations; expected uses of cash during fiscal 2013; the anticipated drivers of our future capital requirements; the impact of our prior sales reorganization on sales performance, particularly in the United States; the expected impact of and benefits from our recent restructuring of operations; anticipated increases in service revenue; the ongoing impact of purchase accounting adjustments; our expectations regarding the factors that will impact sales, competitive positioning and long-term success for our CyberKnife and TomoTherapy Systems; our expectations regarding the impact on our revenues and business of the introduction of our new CyberKnife and TomoTherapy Systems; and the anticipated risks associated with our foreign operations and fluctuations in the U.S. dollar. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, including risks detailed from time to time under the heading “Risk Factors” in Part II, Item 1A of this report, Part I, Item 1A of the Company’s annual report on Form 10-K for fiscal year 2012, and Part II, Item 1A of the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2012. 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 believe we are a leading radiation oncology company with a history of rapid innovations. Our leading edge technologies are designed specifically to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy that is tailored to the specific needs of each patient. Our suite of products includes the CyberKnife® Systems and the TomoTherapy® Systems. The systems are generally complementary offerings, serving generally separate patient populations treated by the same medical specialty.

 

The CyberKnife Systems are robotic systems designed to deliver radiosurgery treatments to cancer tumors anywhere in the body. They 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 allows for the treatment of patients who otherwise would not 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 represents only a small portion of the patients who develop tumors treatable with CyberKnife 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, given the CyberKnife Systems’ design to treat focal tumors, 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 disease, like leukemias and lymphomas, which are not localized to an organ, but rather involve cells throughout the body.

 

In October 2012, we formally introduced two new versions of our technology platforms: the CyberKnife M6 Series and the TomoTherapy H Series. We expect that these new platforms will drive future orders and revenue growth. Due to an aggressive product development and launch plan as well as certain manufacturing and supply issues affecting the new CyberKnife M6 Series with the Multileaf Collimator, or MLC, including low manufacturing yields with the MLC, we have experienced, and may continue to experience, delays in new orders and sales of these systems, which has had and may continue to have an adverse impact on our revenue levels and our business. Further continuation of these manufacturing and supply issues or the occurrence of new manufacturing and supply issues with either the CyberKnife M6 Series or the TomoTherapy H Series may adversely affect market acceptance of these new systems and negatively impact our revenue and our overall business.

 

We believe that the long term success of the CyberKnife System is dependent on a number of factors including the following:

 

·                  Adoption of our recently introduced new CyberKnife platform;

 

·                  Change in medical practice to utilize radiosurgery more regularly as an alternative to surgery or other treatments;

 

17