ACCURAY INC - Quarter Report: 2017 September (Form 10-Q)

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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 September 30, 2017

 

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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):

 

 

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. o

 

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 October 25, 2017, there were 83,918,728 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

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

 

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PART I.         FINANCIAL INFORMATION

 

Item 1.   Unaudited Condensed Consolidated Financial Statements

 

Accuray Incorporated

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share amounts and par value)

 

		September 30,			June 30,
		2017			2017
ASSETS
Current assets:
Cash and cash equivalents		$	67,916		$	72,084
Short-term investments		23,931			23,909
Restricted cash		2,547			12,829
Accounts receivable, net of allowance for doubtful accounts of $428 and $420 as of September 30, 2017 and June 30, 2017, respectively		69,650			72,789
Inventories		113,421			105,054
Prepaid expenses and other current assets		16,909			18,988
Deferred cost of revenue		2,497			3,350
Total current assets		296,871			309,003
Property and equipment, net		21,672			23,062
Goodwill		57,863			57,812
Intangible assets, net		929			964
Restricted cash		333			322
Other assets		16,284			15,301
Total assets		$	393,952		$	406,464
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22,199		$	17,486
Accrued compensation		20,813			25,402
Other accrued liabilities		18,113			23,870
Short-term debt		39,151			113,023
Customer advances		19,364			16,926
Deferred revenue		80,303			87,785
Total current liabilities		199,943			284,492
Long-term liabilities:
Long-term other liabilities		10,414			10,068
Deferred revenue		16,080			13,823
Long-term debt		118,869			51,548
Total liabilities		345,306			359,931
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.001 par value; authorized: 200,000,000 shares as of September 30, 2017 and June 30, 2017, respectively; issued and outstanding: 83,754,665 and 83,739,804 shares at September 30, 2017 and June 30, 2017, respectively		84			84
Additional paid-in-capital		508,014			496,887
Accumulated other comprehensive income (loss)		316			(52		)
Accumulated deficit		(459,768		)	(450,386		)
Total stockholders’ equity		48,646			46,533
Total liabilities and stockholders’ equity		$	393,952		$	406,464

 

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

 

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Accuray Incorporated

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

 

		Three Months Ended
		September 30,
		2017			2016
Net revenue:
Products		$	38,916		$	35,599
Services		52,034			50,907
Total net revenue		90,950			86,506
Cost of revenue:
Cost of products		22,102			23,352
Cost of services		30,742			31,810
Total cost of revenue		52,844			55,162
Gross profit		38,106			31,344
Operating expenses:
Research and development		14,093			12,229
Selling and marketing		14,757			14,318
General and administrative		11,308			11,344
Total operating expenses		40,158			37,891
Loss from operations		(2,052		)	(6,547		)
Other expense, net		(6,571		)	(4,005		)
Loss before provision for income taxes		(8,623		)	(10,552		)
Provision for (benefit from) income taxes		759			(626		)
Net loss		$	(9,382	)	$	(9,926	)
Net loss per share - basic and diluted		$	(0.11	)	$	(0.12	)
Weighted average common shares used in computing net loss per share:
Basic and diluted		83,747			81,576
Net loss		$	(9,382	)	$	(9,926	)
Foreign currency translation adjustment		346			119
Unrealized gain (loss) on investments, net of tax		22			(2		)
Comprehensive loss		$	(9,014	)	$	(9,809	)

 

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

 

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Accuray Incorporated

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

		Three Months Ended
		September 30,
		2017			2016
Cash flows from operating activities
Net loss		$	(9,382	)	$	(9,926	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,514			4,655
Share-based compensation		2,432			3,473
Amortization of debt issuance costs		448			403
Amortization and accretion of discount and premium on investments		—			41
Accretion of interest on debt		862			816
Provision for (recovery of) bad debt, net		8			(27		)
Provision for write-down of inventories		354			303
Loss on disposal of property and equipment		11			—
Loss on extinguishment of debt		3,192			—
Changes in assets and liabilities:
Accounts receivable		1,932			757
Inventories		(8,792		)	(1,517		)
Prepaid expenses and other assets		2,506			964
Deferred cost of revenue		991			57
Accounts payable		4,791			1,768
Accrued liabilities		(11,653		)	(4,985		)
Customer advances		2,374			(926		)
Deferred revenues		(5,615		)	(2,619		)
Net cash used in operating activities		(13,027		)	(6,763		)
Cash flows from investing activities
Purchases of property and equipment, net		(929		)	(1,299		)
Purchases of investments		—			(8,992		)
Sales and maturities of investments		—			15,382
Net cash (used in) provided by investing activities		(929		)	5,091
Cash flows from financing activities
Proceeds from employee stock plans		900			1,227
Taxes paid related to net share settlement of equity awards		(19		)	(99		)
Proceeds from issuance of convertible notes, net		27,282			—
Repurchase of convertible notes		(29,581		)	(36,608		)
Borrowings under revolving credit facility		43,686			—
Repayments under revolving credit facility		(43,435		)	—
Net cash used in financing activities		(1,167		)	(35,480		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		684			584
Net decrease in cash, cash equivalents and restricted cash		(14,439		)	(36,568		)
Cash, cash equivalents and restricted cash at beginning of period		85,235			122,133
Cash, cash equivalents and restricted cash at end of period		$	70,796		$	85,565

 

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

 

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Accuray Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

 

Description of Business

 

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

 

Note 1. Basis of Presentation and Principles of Consolidation

 

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 have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported condensed consolidated cash flows or statements of operations. The results for the three months ended September 30, 2017 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. The Company’s significant accounting policies are described in Note 2 to those audited consolidated financial statements and there have been no subsequent material changes to such policies.

 

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.

 

Accounting Pronouncements Not Yet Effective

 

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 Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

 

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

 

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guidance will be effective for the Company in the first quarter of its fiscal year 2019. 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 ASU 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.

 

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 ASU will be effective for the Company in the first quarter of its fiscal year 2019. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

 

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 ASU will be effective for the Company in the first quarter of its fiscal year 2021 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of the Company’s fiscal year 2020. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

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 finance or operating lease. This ASU will be effective for the Company in the first quarter of its fiscal year 2020 and early adoption is permitted. The ASU requires adoption based upon a modified retrospective transition approach. Company has not yet selected a transition method, has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its 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 become 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 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. In August 2015, the FASB approved a one year deferral of the effective period of ASU 2014-09. The standard will be effective for the Company in the first quarter of its fiscal year 2019. The FASB issued supplemental adoption guidance and clarification to ASU 2014-09 in 2016 and 2017. 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.

 

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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 $9.0 million and $7.4 million at September 30, 2017 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. Accounts rated as low risk typically have the equivalent of a Moody’s rating of Baa3 or higher, while accounts rated as moderate risk generally have the equivalent of Ba1 or lower. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of non-payments. As of September 30, 2017, 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 September 30, 2017 and June 30, 2017. Based upon such assessment, the Company did not record any adjustment to the allowance for credit losses related to such financing receivables as of September 30, 2017 and recorded an allowance of $0.04 million for credit losses related to such financing receivables as of June 30, 2017.

 

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

 

					Financed
		Lease			Service Contracts
September 30, 2017		Receivables			and Other			Total
Gross		$	3,797		$	7,869		$	11,666
Unearned income		(386		)	—			(386		)
Allowance for credit loss		(39		)	—			(39		)
Total, net		$	3,372		$	7,869		$	11,241
Reported as:
Current		$	730		$	1,551		$	2,281
Non-current		2,642			6,318			8,960
Total, net		$	3,372		$	7,869		$	11,241

 

					Financed
		Lease			Service Contracts
June 30, 2017		Receivables			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

 

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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 September 30, 2017 are presented as follows (in thousands):

 

Year Ending June 30,		Amount
2018 (remaining 9 months)		$	697
2019		930
2020		930
2021		930
2022		310
Total		$	3,797

 

Inventories

 

Inventories consisted of the following (in thousands):

 

		September 30,			June 30,
		2017			2017
Raw materials		$	43,564		$	38,803
Work-in-process		18,527			15,471
Finished goods		51,330			50,780
Inventories		$	113,421		$	105,054

 

Property and equipment, net

 

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

 

		September 30,			June 30,
		2017			2017
Furniture and fixtures		$	4,380		$	4,364
Computer and office equipment		11,800			11,802
Software		11,465			11,457
Leasehold improvements		23,197			23,164
Machinery and equipment		48,775			48,742
Construction in progress		3,091			3,533
		102,708			103,062
Less: Accumulated depreciation		(81,036		)	(80,000		)
Property and equipment, net		$	21,672		$	23,062

 

Depreciation expense related to property and equipment for the three months ended September 30, 2017 and 2016 was $2.5 million and $2.7 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.

 

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

 

		September 30,			June 30,
		2017			2017
Net unrealized loss on short-term investments		$	(67	)	$	(89	)
Cumulative foreign currency translation adjustment		1,500			1,154
Defined benefit pension obligation		(1,117		)	(1,117		)
Accumulated other comprehensive income (loss)		$	316		$	(52	)

 

Note 4. Goodwill and Intangible Assets

 

Goodwill

 

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

 

		Three Months			Year
		Ended			Ended
		September 30,			June 30,
		2017			2017
Balance at the beginning of the period		$	57,812		$	57,848
Currency translation		51			(36		)
Balance at the end of the period		$	57,863		$	57,812

 

In the second quarter of fiscal 2017, the Company performed its annual goodwill impairment test. Based on this analysis, the Company determined that there was no impairment to goodwill. The Company will continue to monitor its recorded goodwill for indicators of impairment. In the three months ended September 30, 2017, there were no indicators of impairment.

 

Intangible Assets

 

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

 

				September 30, 2017									June 30, 2017
				Gross									Gross
				Carrying			Accumulated			Net			Carrying			Accumulated			Net
		Useful Lives		Amount			Amortization			Amount			Amount			Amortization			Amount
		(in years)
Developed technology		5 — 6		$	46,700		$	(46,700	)	$	—		$	46,700		$	(46,700	)	$	—
Patent license		7		1,000			(71		)	929			1,000			(36		)	964
Total intangible assets				$	47,700		$	(46,771	)	$	929		$	47,700		$	(46,736	)	$	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 September 30, 2017 and June 30, 2017.

 

Amortization expense related to intangible assets for the three months ended September 30, 2017 and 2016 was $0.04 million and $2.0 million, respectively.

 

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The estimated future amortization expense of acquired intangible assets as of September 30, 2017 is as follows (in thousands):

 

Year Ending June 30,		Amount
2018 (remaining 9 months)		$	108
2019		143
2020		143
2021		143
2022		143
Thereafter		249
		$	929

 

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.

 

The Company held a total of eight investments that were in an unrealized loss position as of September 30, 2017 and June 30, 2017, respectively. The Company reviews its investments quarterly to identify and evaluate investments that have an indication of possible impairment. The Company determined that it had no other-than-temporary impairments on these securities because it does not intend to sell these securities and believes it is not more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis. Gross realized gains and losses were insignificant for the three months ended September 30, 2017 and the year ended June 30, 2017.

 

Contractual maturities of available-for-sale securities at September 30, 2017 were as follows (in thousands):

 

		Amortized			Estimated
		Cost			Fair Value
Due in 1 year or less		$	17,999		$	17,960
Due in 1-2 years		6,000			5,971
		$	23,999		$	23,931

 

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

 

		Less Than 12 Months						12 Months or Greater						Total
		Gross						Gross						Gross
		Unrealized			Estimated			Unrealized			Estimated			Unrealized			Estimated
		Losses			Fair Value			Losses			Fair Value			Losses			Fair Value
September 30, 2017
U. S. government agency securities		$	(38	)	$	17,960		$	(29	)	$	5,971		$	(67	)	$	23,931
Total		$	(38	)	$	17,960		$	(29	)	$	5,971		$	(67	)	$	23,931
June 30, 2017
U. S. government agency securities		$	(31	)	$	11,970		$	(58	)	$	11,939		$	(89	)	$	23,909
Total		$	(31	)	$	11,970		$	(58	)	$	11,939		$	(89	)	$	23,909

 

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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 maturities up to three months that mitigate 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. The Company intends to exchange foreign currencies for U.S. Dollars at maturity. There were no outstanding foreign currency forward contracts at the end of September 30, 2017 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
		September 30,
		2017			2016
Foreign currency exchange gain (loss) on foreign contracts		$	241		$	(563	)
Foreign currency transactions gain		4			132

 

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.

 

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 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.

 

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The tables below set forth, by level, the Company’s financial assets that were accounted for at fair value (in thousands):

 

		September 30, 2017
											Estimated Fair Value
					Gross			Gross			Cash and
		Amortized			Unrealized			Unrealized			Cash			Short-term
		Cost			Gains			Losses			Equivalents			Investments
Cash		$	66,304		$	—		$	—		$	66,304		$	—
Level 1
Money market funds		1,612			—			—			1,612			—
Level 2
U.S. government agency securities		23,998			—			(67		)	—			23,931
Total		$	91,914		$	—		$	(67	)	$	67,916		$	23,931

 

		June 30, 2017
											Estimated Fair Value
					Gross			Gross			Cash and
		Amortized			Unrealized			Unrealized			Cash			Short-term
		Cost			Gains			Losses			Equivalents			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 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, the 3.50% Series A Convertible Notes and the 3.75% Convertible Notes are not readily available. The carrying value of the Revolving Credit Facility approximates 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 Revolving Credit Facility is classified as Level 2 within the fair value hierarchy.

 

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

 

		September 30, 2017						June 30, 2017
		Carrying Value			Fair Value			Carrying Value			Fair Value
3.50% Convertible Notes		$	12,907		$	13,260		$	44,099		$	48,146
3.50% Series A Convertible Notes		26,244			27,083			68,924			74,982
3.75% Convertible Notes		67,069			85,000			—			—
Revolving Credit Facility		51,800			51,800			51,548			51,548
Total		$	158,020		$	177,143		$	164,571		$	174,676

 

Note 8. Commitments and Contingencies

 

Litigation

 

From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. The Company records a provision for a loss when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Currently, management believes the Company does not have any probable and estimable losses related to any current legal

 

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proceedings and claims. Although occasional adverse decisions or settlements may occur, management does not believe that an adverse determination with respect to any of these claims would individually or in the aggregate materially and adversely affect the Company’s financial condition or operating results. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters that could have a material impact on its results of operations, financial position and cash flows.

 

Software License Indemnity

 

Under the terms of the Company’s software license agreements with its customers, the Company agrees that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of a third-party, it will indemnify its customer licensees against any loss, expense, or liability from any damages that may be awarded against them. 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 September 30, 2017.

 

Note 9. Debt

 

3.50% Convertible Senior Notes due February 2018

 

In February 2013, the Company issued 3.50% Convertible Senior Notes due 2018 (the “3.50% Convertible Notes”) under an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Convertible Notes may convert their notes at any time until the close of the business day immediately preceding the maturity date. The 3.50% Convertible Notes are convertible into common stock of the Company at an initial conversion rate equal to 187.6877 shares of common stock per $1,000 principal amount, which is equivalent to a conversion price of approximately $5.33 per share of common stock, subject to adjustment. The 3.50% Convertible Notes bear interest at a rate of 3.50% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year. The 3.50% Convertible Notes will mature on February 1, 2018, unless earlier repurchased, redeemed or converted.

 

Holders of the 3.50% Convertible Notes who convert their notes in connection with a “make-whole fundamental change,” as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a “fundamental change,” as defined in the indenture, holders of the 3.50% Convertible Notes may require the Company to purchase all or a portion of their 3.50% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of 3.50% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. As of September 30, 2017, approximately $13.0 million aggregate principal amount was outstanding.

 

3.50% Series A Convertible Senior Notes due February 2018

 

In April 2014, the Company issued 3.50% Series A Convertible Senior Notes due 2018 (the “3.50% Series A Convertible Notes”) under an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Series A Convertible Notes may convert their notes at any time on or after November 1, 2017 until the close of business on the business day immediately preceding the maturity date. The initial conversion rate is 187.6877 shares of the Company’s common stock per $1,000 principal amount, which represents an initial conversion price of approximately $5.33 per share of the Company’s common stock. The 3.50% Series A Convertible Notes generally have the same interest rate, maturity and other terms as the 3.50% Convertible Notes, except that the 3.50% Series A Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s option.

 

Holders of the 3.50% Series A Convertible Notes who convert their notes in connection with a “make-whole fundamental change,” as defined in the indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a “fundamental change,” as defined in the indenture, holders of the 3.50% Series A Convertible Notes may require the Company to purchase all or a portion of their 3.50% Series A Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 3.50% Series A Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. As of September 30, 2017, approximately $26.6 million aggregate principal amount was outstanding.

 

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3.75% Convertible Senior Notes due July 2022

 

In August 2017, the Company issued $85.0 million aggregate principal amount of its 3.75% Convertible Senior Notes due 2022 (the “3.75% Convertible Notes”) under an indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. $53.0 million aggregate principal amount of the 3.75% Convertible Notes were issued to certain holders of the Company’s outstanding 3.50% Convertible Notes and 3.50% Series A Convertible Notes (together, the “Existing Notes”) in exchange for approximately $47.0 million aggregate principal amount of the Existing Notes (the “Exchange”) and $32.0 million aggregate principal amount of the 3.75% Convertible Notes were issued to certain other qualified new investors for cash. The net proceeds of the cash issuance were used to repurchase approximately $28.0 million of Existing Notes (the “Repurchase”).

 

Holders of the 3.75% Convertible Notes may convert their notes at any time on or after April 15, 2022 until the close of the business day immediately preceding the maturity date. Prior to April 15, 2022, holders of the 3.75% Convertible Notes may convert their notes only under the following circumstances:

 

·                  during any fiscal quarter after the fiscal quarter ending December 31, 2017, and only during such fiscal 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 fiscal quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter;

 

·                  during the five-consecutive business days immediately after any five consecutive trading-day period in which the trading price per $1,000 principal amount for each trading day of that period was equal to or less than 98% of the product of the closing sale price of shares of the Company’s common stock and the applicable conversion rate for such trading day; or

 

·                  upon the occurrence of specified corporate transactions as described in the indenture.

 

Upon conversion, the Company will have the right to pay cash, or deliver shares of common stock of the Company or a combination thereof, at the Company’s election. The initial conversion rate is 174.8252 shares of the Company’s common stock per $1,000 principal amount (which represents an initial conversion price of approximately $5.72 per share of the Company’s common stock). The conversion rate, and thus the conversion price, is subject to adjustment as further described below.

 

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

 

In accordance with Accounting Standards Codification, or ASC 470-20, Debt with Conversion and Other Options, the Company separately accounted 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 $66.5 million as of the date of issuance based on the present value of its cash flows using a discount rate of 8%, the Company’s 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 $13.8 million. The debt issuance and offering costs totaling $4.7 million, of which $0.8 million was allocated to the equity component with the remaining $3.9 million allocated to the debt discount. The liability component is being accreted to the principal amount of the 3.75% Convertible Notes using the effective interest method through the maturity in July 2022.

 

Following the issuance of the 3.75% Convertible Notes, approximately $13.0 million aggregate principal amount of the 3.50% Convertible Notes and approximately $26.6 million aggregate principal amount of the 3.50% Series A Convertible Notes remained outstanding. The Company accounted for the Exchange and Repurchase as an extinguishment of the Existing Notes and recorded a charge of approximately $3.2 million in Other expenses, net and a reduction of the carrying value of the equity conversion component of $5.0 million in the first quarter of fiscal 2018.

 

Revolving Credit Facility

 

On June 14, 2017, the Company entered into a credit and security agreement (the “Revolving Credit Facility”) with MidCap Financial Trust. The agreement provides the Company with a revolving credit facility in the initial amount of $52.0 million, which the Company may request be increased by up to $33.0 million to a new total of $85.0 million through additional tranches, each with a $1.0 million minimum. Availability for borrowings under the Revolving Credit Facility is subject to a borrowing base that is calculated as a function of the value of the Company’s eligible accounts receivable and eligible inventory, and the Company is required to maintain a minimum drawn balance of at least 30% of such availability.

 

The Revolving Credit Facility’s stated maturity date is June 14, 2021.

 

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The Revolving Credit Facility contains restrictions and covenants applicable to the Company. Among other requirements, the Company may not permit the Fixed Charge Coverage Ratio (as defined in the Revolving Credit Facility) to be less than a certain specified ratio for each fiscal quarter during the term of the Revolving Credit Facility. In addition, the Revolving Credit Facility contains customary covenants that limit, among other things, the ability of the Company and its subsidiaries to (i) incur indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their assets, (v) make certain loans or investments, (vi) merge or consolidate, (vii) voluntarily repay or prepay certain indebtedness and (viii) enter into transactions with affiliates, in each case subject to certain exceptions. The Company was in compliance with the covenants as of September 30, 2017.

 

The following table presents the carrying value of all Convertible Notes and borrowings under the Revolving Credit Facility (collectively, “Notes”) (in thousands):

 

As of September 30, 2017		Revolving Credit Facility			3.50% Convertible Notes			3.50% Series A Convertible Notes			3.75% Convertible Notes			Total
Carrying amount of equity conversion component		$	—		$	—		$	2,806		$	13,837		$	16,643
Principal amount of the Notes		$	51,800		$	13,000		$	26,552		$	85,000		$	176,352
Unamortized debt costs		—			(93		)	—			(3,789		)	(3,882		)
Unamortized debt discount		—			—			(308		)	(14,142		)	(14,450		)
Net carrying amount		$	51,800		$	12,907		$	26,244		$	67,069		$	158,020
Reported as:
Short-term debt														$	39,151
Long-term debt														118,869
Total debt														$	158,020

 

As of June 30, 2017		Revolving Credit Facility			3.50% Convertible Notes			3.50% Series A Convertible Notes			Total
Carrying amount of equity conversion component		$	—		$	—		$	7,844		$	7,844
Principal amount of the Notes		$	51,548		$	44,654		$	70,346		$	166,548
Unamortized debt costs		—			(555		)	—			(555		)
Unamortized debt discount		—			—			(1,422		)	(1,422		)
Net carrying amount		$	51,548		$	44,099		$	68,924		$	164,571
Reported as:
Short-term debt											$	113,023
Long-term debt											51,548
Total debt											$	164,571

 

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

 

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