UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2018

OR

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

For the transition period from                        to    

Commission File Number: 001-37725

 

ViewRay, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

42-1777485

 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2 Thermo Fisher Way

Oakwood Village, OH

 

44146

 

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (440) 703-3210

 

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 such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

As of November 2, 2018, the registrant had 95,730,214 shares of common stock, $0.01 par value per share, outstanding.

 

 


VIEWRAY, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

3

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

5

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

Item 4.

Controls and Procedures

 

31

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

33

 

 

 

 

Item 1A.

Risk Factors

 

33

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

37

 

 

 

 

Item 4.

Mine Safety Disclosures

 

37

 

 

 

 

Item 5.

Other Information

 

37

 

 

 

 

Item 6.

Exhibits

 

38

 

 

 

 

 

Signatures

 

39

 


2


CAUTIONARY NOTE REGARDING F ORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Report, contains forward-looking statements, including, without limitation, in the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of products, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation:

 

market acceptance of magnetic resonance imaging (“MRI”) guided radiation therapy;

 

the benefits of MR Image-Guided radiation therapy;

 

our ability to successfully sell and market MRIdian in our existing and expanded geographies;

 

the performance of MRIdian in clinical settings;

 

competition from existing technologies or products or new technologies and products that may emerge;

 

the pricing and reimbursement of MR Image-Guided radiation therapy;

 

the implementation of our business model and strategic plans for our business and MRIdian;

 

the scope of protection we are able to establish and maintain for intellectual property rights covering MRIdian;

 

our ability to obtain regulatory approval in targeted markets for MRIdian;

 

our ability to procure materials and components in connection with the manufacture and installation of MRIdian;

 

estimates of our future revenue, expenses, capital requirements and our need for additional financing;

 

our financial performance;

 

our expectations related to the MRIdian linear accelerator technology, or MRIdian Linac;

 

developments relating to our competitors and the healthcare industry; and

 

other risks and uncertainties, including those listed under the section titled “Risk Factors.”

Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A, titled “Risk Factors” discussed elsewhere in this Report, our other Quarterly Reports on Form 10-Q in the fiscal year 2018, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise, except as required by law.

This Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain devices, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this

3


industry, business, market and other data from reports, research surveys, studies and similar data prepared by market resea rch firms and other third parties, industry, medical and general publications, government data and similar sources.

4


PART I—FINANCI AL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

VIEWRAY, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

201,543

 

 

$

57,389

 

Accounts receivable

 

 

22,677

 

 

 

20,326

 

Inventory

 

 

40,547

 

 

 

19,375

 

Deposits on purchased inventory

 

 

5,565

 

 

 

7,043

 

Deferred cost of revenue

 

 

10,909

 

 

 

13,696

 

Prepaid expenses and other current assets

 

 

6,174

 

 

 

4,862

 

Total current assets

 

 

287,415

 

 

 

122,691

 

Property and equipment, net

 

 

13,452

 

 

 

11,564

 

Restricted cash

 

 

1,381

 

 

 

1,143

 

Intangible assets, net

 

 

 

 

 

78

 

Other assets

 

 

1,185

 

 

 

235

 

TOTAL ASSETS

 

$

303,433

 

 

$

135,711

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,964

 

 

$

11,014

 

Accrued liabilities

 

 

13,880

 

 

 

7,207

 

Customer deposits

 

 

12,243

 

 

 

17,820

 

Deferred revenue, current portion

 

 

11,315

 

 

 

20,151

 

Total current liabilities

 

 

44,402

 

 

 

56,192

 

Deferred revenue, net of current portion

 

 

5,206

 

 

 

3,238

 

Long-term debt

 

 

44,649

 

 

 

44,504

 

Warrant liabilities

 

 

21,962

 

 

 

22,420

 

Other long-term liabilities

 

 

9,854

 

 

 

7,370

 

TOTAL LIABILITIES

 

 

126,073

 

 

 

133,724

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Convertible preferred stock, par value of $0.01 per share; 10,000,000 shares authorized

   at September 30, 2018 and December 31, 2017; no shares issued and outstanding

   at September 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, par value of $0.01 per share; 300,000,000 shares authorized at

   September 30, 2018 and December 31, 2017; 95,195,872 and 67,653,974 shares

   issued and outstanding at September 30, 2018 and December 31, 2017

 

 

941

 

 

 

666

 

Additional paid-in capital

 

 

558,656

 

 

 

321,174

 

Accumulated deficit

 

 

(382,237

)

 

 

(319,853

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

177,360

 

 

 

1,987

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

303,433

 

 

$

135,711

 

 

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

5


VIEWRAY, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

16,492

 

 

$

11,358

 

 

$

57,237

 

 

$

11,358

 

Service

 

 

1,056

 

 

 

721

 

 

 

2,706

 

 

 

2,408

 

Distribution rights

 

 

118

 

 

 

118

 

 

 

356

 

 

 

356

 

Total revenue

 

 

17,666

 

 

 

12,197

 

 

 

60,299

 

 

 

14,122

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

15,199

 

 

 

9,728

 

 

 

49,564

 

 

 

10,322

 

Service

 

 

2,103

 

 

 

484

 

 

 

4,732

 

 

 

1,758

 

Total cost of revenue

 

 

17,302

 

 

 

10,212

 

 

 

54,296

 

 

 

12,080

 

Gross margin

 

 

364

 

 

 

1,985

 

 

 

6,003

 

 

 

2,042

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,347

 

 

 

3,616

 

 

 

12,506

 

 

 

9,781

 

Selling and marketing

 

 

3,384

 

 

 

2,510

 

 

 

10,024

 

 

 

5,453

 

General and administrative

 

 

16,721

 

 

 

7,502

 

 

 

37,070

 

 

 

22,116

 

Total operating expenses

 

 

24,452

 

 

 

13,628

 

 

 

59,600

 

 

 

37,350

 

Loss from operations

 

 

(24,088

)

 

 

(11,643

)

 

 

(53,597

)

 

 

(35,308

)

Interest income

 

 

2

 

 

 

1

 

 

 

6

 

 

 

3

 

Interest expense

 

 

(1,974

)

 

 

(1,843

)

 

 

(5,758

)

 

 

(5,372

)

Other (expense) income, net

 

 

(6,792

)

 

 

2,269

 

 

 

(307

)

 

 

(6,853

)

Loss before provision for income taxes

 

$

(32,852

)

 

$

(11,216

)

 

$

(59,656

)

 

$

(47,530

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and comprehensive loss

 

$

(32,852

)

 

$

(11,216

)

 

$

(59,656

)

 

$

(47,530

)

Amortization of beneficial conversion feature related to Series A convertible preferred stock

 

$

 

 

$

 

 

$

(2,728

)

 

$

 

Net loss attributable to common stockholders, basic and diluted

 

$

(32,852

)

 

$

(11,216

)

 

$

(62,384

)

 

$

(47,530

)

Net loss per share, basic and diluted

 

$

(0.39

)

 

$

(0.19

)

 

$

(0.82

)

 

$

(0.85

)

Weighted-average common shares used to compute net loss per

   share attributable to common stockholders, basic and diluted

 

 

84,920,996

 

 

 

59,061,149

 

 

 

76,185,346

 

 

 

56,064,562

 

 

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

6


VIEWRAY, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(59,656

)

 

$

(47,530

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,561

 

 

 

1,574

 

Stock-based compensation

 

 

10,052

 

 

 

2,766

 

Accretion on asset retirement obligation

 

 

26

 

 

 

29

 

Change in fair value of warrant liabilities

 

 

(116

)

 

 

6,739

 

Loss on disposal of property and equipment

 

 

1

 

 

 

9

 

Inventory lower of cost or market adjustment

 

 

 

 

 

647

 

Amortization of debt discount and interest accrual

 

 

2,703

 

 

 

2,453

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,351

)

 

 

3,158

 

Inventory

 

 

(22,412

)

 

 

(11,143

)

Deposits on purchased inventory

 

 

1,478

 

 

 

(3,593

)

Deferred cost of revenue

 

 

2,327

 

 

 

(6,481

)

Prepaid expenses and other assets

 

 

(2,262

)

 

 

(2,124

)

Accounts payable

 

 

(4,067

)

 

 

2,108

 

Accrued expenses and other long-term liabilities

 

 

6,732

 

 

 

2,519

 

Customer deposits and deferred revenue

 

 

(12,445

)

 

 

5,175

 

Net cash used in operating activities

 

 

(77,429

)

 

 

(43,694

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(2,814

)

 

 

(1,117

)

Net cash used in investing activities

 

 

(2,814

)

 

 

(1,117

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from common stock public offering, gross

 

 

172,500

 

 

 

 

Payment of offering costs related to common stock public offering

 

 

(10,631

)

 

 

 

Proceeds from common stock private placement, gross

 

 

 

 

 

26,100

 

Payment of offering costs related to common stock private placement

 

 

 

 

 

(300

)

Proceeds from at-the-market offering of common stock, gross

 

 

278

 

 

 

40,126

 

Payment of offering costs related to at-the-market offering of common stock

 

 

(6

)

 

 

(1,147

)

Proceeds from direct registered offering, gross

 

 

59,100

 

 

 

 

Payment of offering costs related to direct registered offering

 

 

(177

)

 

 

 

Proceeds from the exercise of stock options

 

 

3,571

 

 

 

247

 

Net cash provided by financing activities

 

 

224,635

 

 

 

65,026

 

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

144,392

 

 

 

20,215

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — BEGINNING OF PERIOD

 

 

58,532

 

 

 

15,341

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH — END OF PERIOD

 

$

202,924

 

 

$

35,556

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,055

 

 

$

2,919

 

Cash paid for taxes

 

$

 

 

$

25

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Transfer of inventory and deferred cost of revenue to property and equipment

 

$

1,700

 

 

$

125

 

Purchase of property and equipment in accounts payable and accrued liabilities

 

$

129

 

 

$

277

 

Fair value of common stock warrants reclassified from liability to additional paid-in capital upon exercise

 

$

342

 

 

$

 

 

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


7


VIEWRAY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Background and Organization

ViewRay, Inc., or ViewRay or the Company, and its wholly-owned subsidiary ViewRay Technologies, Inc., designs, manufactures and markets MRIdian, an MR Image-Guided radiation therapy system to simultaneously image and treat cancer patients.

Since inception, ViewRay Technologies, Inc. has devoted substantially all of its efforts towards research and development, initial selling and marketing activities, raising capital and the manufacturing, shipment and installation of MRIdian systems. In May 2012, ViewRay Technologies, Inc. was granted clearance from the U.S. Food and Drug Administration, or FDA, to sell MRIdian with Cobalt-60. In November 2013, ViewRay Technologies, Inc. received its first clinical acceptance of a MRIdian with Cobalt-60 at a customer site, and the first patient was treated with that system in January 2014. ViewRay Technologies, Inc. has had the right to affix the CE mark to MRIdian with Cobalt-60 in the European Economic Area since November 2014. In September 2016, the Company received the rights to affix the CE mark to MRIdian Linac, and in February 2017, the Company received 510(k) clearance from the FDA to market MRIdian Linac.

The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for a reasonable period of time. The Company’s principal sources of liquidity are cash flows from public and private offerings of capital stocks and available borrowings under its term loan agreement, as well as from sales of its systems and services. These have historically been sufficient to meet working capital needs, capital expenditures, and debt service obligations. During the nine months ended September 30, 2018, the Company incurred a net loss of $59.7 million and used cash in operations of $77.4 million. The Company believes that its existing cash balance of $201.5 million as of September 30, 2018, together with anticipated cash proceeds from sales of MRIdian systems will be sufficient to fund operations for at least the next 12 months.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. The condensed consolidated financial statements include the accounts of ViewRay, Inc. and its wholly-owned subsidiary, ViewRay Technologies, Inc. All inter-company accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements, have been included. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any future period. These unaudited condensed consolidated financial statements and their notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Effective January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, or ASC 606, Revenues from Contracts with Customers, by using the full retrospective method. The adoption of ASC 606 has no impact on the Company’s prior period financial statements.  Please see the Company’s “Revenue Recognition” policy in the “Significant Accounting Policies” section below for further information and related disclosures.

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on March 12, 2018, and have not changed significantly since that filing, except for the impact of the adoption of the new accounting guidance related to revenue recognition.  

Revenue Recognition

The Company derives revenues primarily from the sale of MRIdian systems and related services as well as support and maintenance services on sold systems. The Company accounts for revenue contracts with customers by applying the requirements of ASC 606, which includes the following steps:

 

Identification of the contract, or contracts, with a customer;

 

Identification of the performance obligations in the contract;

 

Determination of the transaction price;

8


 

Allocation of the transaction price to the performance obligations in the contract; and

 

Recognition of revenue when, or as, the Company satisfies a performance obligation.

 

In all sales arrangements, revenues are recognized when control of the promised goods or services are transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services. For sales of MRIdian systems that the Company is required to install at the customer site, product revenue is recognized upon receipt of customer acceptance. For sales of MRIdian systems for which the Company is not responsible for installation, product revenue is recognized when the entire system is delivered and control of the system is transferred to the customer. For sales of the related support and maintenance services, a time-elapsed method is used to measure progress toward complete satisfaction of performance obligations and service revenue is recognized ratably over the service contract term, which is typically 12 months.

 

Arrangements with Multiple Performance Obligation

The Company frequently enters into sales arrangements that include multiple performance obligations. Such performance obligations mainly consist of (i) sale of MRIdian systems, which generally includes installation and embedded software, and (ii) product support, which includes extended service and maintenance. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The standalone selling price, or SSP, is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, the Company will estimate the SSP considering market conditions or internally approved pricing guidelines related to the performance obligations.

Product Revenue

Product revenue is derived primarily from the sales of MRIdian system. The system contains both software and non-software components that together deliver essential functionality.

The Company’s customer contracts generally call for on-site assembly of the system components and system integration. Once the system installation is completed, the Company performs a detailed demonstration with the customer showing that the MRIdian system meets the standard product specifications. After successful demonstration, the customer signs a document indicating customer’s acceptance. For sales of MRIdian systems that the Company is required to install at the customer site, revenue recognition occurs when the customer acknowledges that the system operates in accordance with standard product specifications, the customer accepts the installed unit by signing the acceptance document and the control of the system is transferred to the customer.

Certain customer contracts with distributors do not require ViewRay installation at the customer site, and the distributors typically perform the installation. For sales of MRIdian systems for which the Company is not responsible for installation, revenue recognition occurs when the entire system is delivered, and the control of the system is transferred to the customer.

Service Revenue

Service revenue is derived primarily from maintenance services. The maintenance and support service is a stand-ready obligation which is performed over the term of the arrangement and, as a result, service revenue is recognized ratably over the service period as the customers benefit from the service throughout the service period.

Distribution Rights Revenue

In December 2014, the Company entered into a distribution agreement with Itochu Corporation pursuant to which it appointed Itochu as its exclusive distributor for the promotion, sale and delivery of MRIdian products within Japan.  In consideration of the exclusive distribution rights granted, the Company received $4.0 million, which was recorded as deferred revenue. Starting in August 2016, distribution rights revenue is recognized ratably over the remaining term of the distribution agreement of approximately 8.5 years A time-elapsed method is used to measure progress because the control is transferred evenly over the remaining contractual period.  

 

The following table presents revenue disaggregated by type and geography (in thousands):

 

9


 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

U.S.

2018

 

 

2017

 

 

2018

 

 

2017

 

Product

$

6,187

 

 

$

5,739

 

 

$

25,775

 

 

$

5,739

 

Service

 

566

 

 

 

388

 

 

 

1,464

 

 

 

1,579

 

Total U.S. revenue

$

6,753

 

 

$

6,127

 

 

$

27,239

 

 

$

7,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outside of U.S. ("OUS")

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

$

10,305

 

 

$

5,619

 

 

$

31,462

 

 

$

5,619

 

Service

 

490

 

 

 

333

 

 

 

1,242

 

 

 

829

 

Distribution rights

 

118

 

 

 

118

 

 

 

356

 

 

 

356

 

Total OUS revenue

$

10,913

 

 

$

6,070

 

 

$

33,060

 

 

$

6,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

$

16,492

 

 

$

11,358

 

 

$

57,237

 

 

$

11,358

 

Service

 

1,056

 

 

 

721

 

 

 

2,706

 

 

 

2,408

 

Distribution rights

 

118

 

 

 

118

 

 

 

356

 

 

 

356

 

Total revenue

$

17,666

 

 

$

12,197

 

 

$

60,299

 

 

$

14,122

 

 

Contract Balances

The timing of revenue recognition, billings and cash collections results in short-term and long-term trade receivables, customer deposits, deferred revenues and deferred cost of revenue on the condensed consolidated balance sheets.

Trade receivables are recorded at the original invoiced amount, net of an estimated allowance for doubtful accounts. Trade credit is generally extended on a short-term basis. The Company occasionally provides for long-term trade credit for its maintenance services so that the period between when the services are rendered to its customers and when the customers pay for that service is within one year. Thus, the Company’s trade receivables do not bear interest or contain a significant financing component. Long-term trade receivables of $400 thousand were reported within other assets in the condensed consolidated balance sheets at September 30, 2018. These amounts are billed in accordance with the terms of the customer contracts to which they relate and are expected to be collected three to four years from the date of invoice as the underlying maintenance services are rendered. At times, billing occurs subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. This contract asset is recorded as an unbilled receivable and reported as part of accounts receivable on the condensed consolidated balance sheets. The Company had no long-term trade receivables at December 31, 2017.

Trade receivables are periodically evaluated for collectability based on past credit history of the respective customers and their current financial condition. Changes in the estimated collectability of trade receivables are included in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for doubtful accounts. The Company generally does not require collateral for trade receivables. There was no allowance for doubtful accounts recorded at September 30, 2018 or December 31, 2017.

Customer deposits represent payments received in advance of system installation. For domestic and international sales, advance payments received prior to inventory shipments and customer acceptance are recorded as customer deposits. Advance payments are subsequently reclassified to deferred revenue upon inventory shipment when the title and risk of loss of inventory items transfer to customers. All customer deposits, including those that are expected to be a deposit for more than one year, are classified as current liabilities based on consideration of the Company’s normal operating cycle (the time between acquisition of the inventory components and the final cash collection from customers on these inventory components) which is in excess of one year.

Deferred revenue consists of deferred product revenue and deferred service revenue. Deferred product revenue arises from timing differences between the fulfillment of contract obligations and satisfaction of all revenue recognition criteria consistent with the Company’s revenue recognition policy. Deferred service revenue results from the advance billing for services to be delivered over a period of time. Deferred revenues expected to be realized within one year or normal operating cycle are classified as current liabilities.

Deferred cost of revenue consists of cost for inventory items that have been shipped with title and risk of loss transferred to the customer, but the customer acceptance has not yet been received. Deferred cost of revenue is included as part of current assets as the corresponding deferred product revenue is expected to be realized within one year or the Company’s normal operating cycle.

During the three and nine months ended September 30, 2018, the Company recognized $12.2 million and $18.3 million revenue that was included in the deferred revenue balance at the beginning of each reporting period. During the three and nine months ended September 30, 2017, the Company recognized $9.0 million and $5.8 million revenue that was included in the deferred revenue balance at the beginning of each reporting period.

 

10


Variable Consideration

The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. The Company estimates the transaction price at contract inception, including any variable consideration, and updates the estimate each reporting period for any changes. During the three and nine months ended September 30, 2018, one of the contracts contained variable consideration, which is attributed to an asserted penalty that the Company is disputing related to a system installation for one customer.  The Company estimated the variable consideration based on the best information available to management and applied the most likely amount method to estimate the transaction price. The transaction price, which includes variable consideration reflecting the impact of the asserted penalty dispute, may be subject to constraint and is included in the net revenues only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period when the uncertainty is subsequently resolved. The net transaction price after reducing the variable consideration was then proportionally allocated to all the distinct performance obligations in the transaction. The Company will update the estimate of the variable consideration at each reporting period until the uncertainty is resolved. 

Practical Expedients Election

As part of the Company's adoption of ASC 606, the Company elected to use the practical expedient to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. Such costs include the Company's internal sales force compensation program.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02,  Leases (Topic 842) and issued subsequent amendments to the initial guidance in September 2017 within ASU 2017-13, in January 2018 within ASU 2018-01 and in July 2018 within ASU 2018-11 (collectively, Topic 842). Topic 842 supersedes Topic 840, Leases, and requires lessees to recognize on their balance sheets all leases, with the exception of short-term leases, as a right-of-use asset and a corresponding lease liability measured at the present value of the lease payments. The ASU also requires additional disclosures about the amount, timing and uncertainty of cash flow from leases. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. As disclosed in Note 6, future minimum payments under noncancelable operating leases are approximately $16.2 million. The Company will adopt the new standard using the modified retrospective transition approach and recognize a cumula tive effect adjustment to the opening balance of retained earnings on the effective date. As permitted by the standard, the Company expects to elect the transition practical expedient package, which, among other things, allows the carryforward of historical lease classifications. The Company is further evaluating other optional practical expedients and policy elections and continues to evaluate the impact of this guidance on its consolidated financial statements. The ultimate impact of adoption will depend on the total amount of the Company's lease commitments as of the adoption date.           

In June 2018, the FASB issued ASU No. 2018-07, Compensation Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting , which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Company is evaluating the impact of this update on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. The Company is allowed to early adopt either the entire standard or only the provisions that eliminate or modify the requirements of Topic 820. The Company is evaluating the impact of this update on its consolidated financial statements.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASC 606. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Effective January 1, 2018, the Company adopted the requirements of ASC 606 using the full retrospective method. The adoption had no impact on the prior period financial statements, and the related disclosures required by the new standard have been updated in the “Significant Accounting Policies” section above.

On January 1, 2018, the Company adopted ASU No.2016-15 , Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments and ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash on a retrospective basis. The adoption of ASU 2016-15 did not have a material impact on the Company’s condensed consolidated statements of cash flows and related disclosures. Under ASU 2016-18, restricted cash and restricted cash equivalent amounts are presented along with cash and cash equivalents when reconciling the total beginning and ending amounts shown on the statements of cash flows. The Company

11


reflected the impact of ASU 2016-18 to the comparative prior period which resulted in an increase in the beginning and ending cash, cash equivalents and restricted cash of $ 1.1 million.

In May 2017, the FASB issued ASU No. 2017-09 , Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting , which provides clarified guidance on applying modification accounting to changes in the terms or conditions of a share-based payment award. The Company adopted ASU 2017-09 on January 1, 2018, and there was no material impact on its condensed consolidated financial statements and related disclosures.

I n the first quarter of 2018, the Company adopted ASU No. 2018-05,  Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which included amendments to expand income tax accounting and disclosure guidance pursuant to SEC Staff Accounting Bulletin No. 118, or SAB 118, issued by the SEC in December 2017. SAB 118 provides guidance on accounting for the income tax effects of the Tax Reform Act. Refer to Note 12, Income Taxes, for more information and disclosures related to this amended guidance.

 

3.

Balance Sheet Components

Property and Equipment

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

 

 

September 30,

2018

 

 

December 31,

2017

 

Prototype

 

$

12,425

 

 

$

11,929

 

Machinery and equipment

 

 

11,684

 

 

 

7,831

 

Leasehold improvements

 

 

4,327

 

 

 

4,438

 

Software

 

 

1,244

 

 

 

1,142

 

Furniture and fixtures

 

 

588

 

 

 

558

 

Property and equipment, gross

 

 

30,268

 

 

 

25,898

 

Less: accumulated depreciation and amortization

 

 

(16,816

)

 

 

(14,334

)

Property and equipment, net

 

$

13,452

 

 

$

11,564

 

 

Depreciation and amortization expense related to property and equipment were $906 thousand and $565 thousand during the three months ended September 30, 2018 and 2017, respectively; and $2.5 million and $1.6 million during the nine months ended September 30, 2018 and 2017, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

September 30,

2018

 

 

December 31,

2017

 

Accrued payroll and related benefits

 

$

5,951

 

 

$

3,944

 

Accrued accounts payable

 

 

2,642

 

 

 

2,671

 

Payroll withholding tax, sales and other tax payable

 

 

4,733

 

 

 

149

 

Accrued legal, accounting and professional fees

 

 

498

 

 

 

322

 

Other

 

 

56

 

 

 

121

 

Total accrued liabilities

 

$

13,880

 

 

$

7,207

 

Deferred Revenue

Deferred revenue consisted of the following (in thousands):

 

 

 

September 30,

2018

 

 

December 31,

2017

 

Deferred revenue:

 

 

 

 

 

 

 

 

Product

 

$

7,478

 

 

$

18,861

 

Service

 

 

6,053

 

 

 

1,182

 

Distribution rights

 

 

2,990

 

 

 

3,346

 

Total deferred revenue

 

 

16,521

 

 

 

23,389

 

Less: current portion of deferred revenue

 

 

(11,315

)

 

 

(20,151

)

Noncurrent portion of deferred revenue

 

$

5,206

 

 

$

3,238

 

 

12


Other Long-Term Liabilities

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

 

 

 

Accrued interest, noncurrent portion

 

$

8,777

 

 

$

6,218

 

Deferred rent, noncurrent portion

 

 

492

 

 

 

167

 

Other

 

 

585

 

 

 

985

 

Total other-long term liabilities

 

$

9,854

 

 

$

7,370

 

 

4.

Fair Value of Financial Instruments

The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at September 30, 2018 and December 31, 2017. Level 3 liabilities that are measured on a recurring basis consist of the 2017 and 2016 Placement Warrants, as described in Note 8. Placement warrant liabilities are valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock, volatility and estimated term would result in a directionally similar impact to the fair value of the warrants (see Note 10).

The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. During the three and nine months ended September 30, 2018, the Company recorded a loss of $6.7 million and a gain of $0.4 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants. During the three and nine months ended September 30, 2017, the Company recorded a gain of $2.3 million and a loss of $6.7 million in other income (expense), net within the condensed consolidated statements of operations and comprehensive loss, respectively, related to the change in fair value of the 2017 and 2016 Placements Warrants. There were no transfers between Level 1, Level 2 and Level 3 in any periods presented.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy (in thousands): 

 

 

At September 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

2017 Placement Warrants Liability

 

$

 

 

$

 

 

$

12,400

 

 

$

12,400

 

2016 Placement Warrants Liability

 

 

 

 

 

 

 

 

9,562

 

 

 

9,562

 

    Total

 

$

 

 

$

 

 

$

21,962

 

 

$

21,962

 

 

 

 

At December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

2017 Placement Warrants Liability

 

$

 

 

$

 

 

$

12,487

 

 

$

12,487

 

2016 Placement Warrants Liability

 

 

 

 

 

 

 

 

9,933

 

 

 

9,933

 

    Total

 

$

 

 

$

 

 

$

22,420

 

 

$

22,420

 

 

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 financial liabilities (in thousands):

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Fair value, beginning of period

 

$

22,420

 

 

$

2,723

 

Issuance of 2017 Placement Warrants

 

 

 

 

 

3,373

 

Fair value of common stock warrants reclassified from liability to additional paid-in capital upon exercise

 

 

(342

)

 

 

 

Change in fair value of Level 3 financial liabilities

 

 

(116

)

 

 

6,739

 

Fair value, end of period

 

$

21,962

 

 

$

12,835

 

 

13


5.

Debt

CRG Term Loan

In June 2015, ViewRay Technologies, Inc. entered into a term loan agreement, or the CRG Term Loan, with Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P., Capital Royalty Partners II (Cayman) L.P. and Parallel Investment Opportunities Partners II L.P. or together with their successors by assignment, CRG, for up to $50.0 million, of which $30.0 million was made available to the Company upon closing and the remaining $20.0 million to be available on or before June 30, 2016, upon the achievement of certain milestones. The Company drew down the first $30.0 million on the closing date. The CRG Term Loan has a maturity date of June 30, 2020 and bears cash interest at a rate of 12.5% per annum to be paid quarterly during the interest-payment-only period of 3 years. In April 2017, the CRG Term Loan was amended to allow for interest-payment-only until March 31, 2020. During the interest-payment-only period, the Company has the option to elect to pay only 8% of the 12.5% per annum interest in cash, and the remaining 4.5% of the 12.5% per annum interest as compounded interest, or deferred payment in-kind interest, added to the aggregate principal amount of the CRG Term Loan. Principal payment and any deferred payment in-kind interest will be paid on the maturity date.

The CRG Term Loan is subject to a prepayment penalty of: 3% on the outstanding balance during the first 12 months following the funding of the Term Loan; 2% on the outstanding balance after year 1 but on or before year 2; 1% on the outstanding balance after year 2 but on or before year 3; and 0% on the outstanding loan if prepaid after year 3 thereafter until maturity. The CRG Term Loan is also subject to a facility fee of 7% based on the total outstanding principal and in-kind interest, which is payable on the maturity date. All direct financing costs were accounted for as a discount on the CRG Term Loan and are amortized to interest expense during the term of the loan using the effective interest method. The CRG Term Loan is subject to financial covenants and is collateralized by essentially all assets of the Company and limits the Company’s ability with respect to additional indebtedness, investments or dividends, among other things, subject to customary exceptions.

In March 2016, the Company amended the agreement with regard to the conditions for borrowing the remaining $20.0 million under the CRG Term Loan if certain product and service revenue amounts were achieved. In May 2016, the Company drew down an additional $15.0 million under the CRG Term Loan.

In April and October 2017, and in February 2018, the Company executed three amendments, which allowed the Company to borrow the remaining $5.0 million through June 30, 2017, included an additional $15.0 million borrowing capacity available through December 31, 2017, extended the interest-only and payment in-kind period, decreased the combined 2016 and 2017 revenue covenant, and increased the facility fee by 1.75%. The Company did not draw down any amounts under these amendments and they have since expired.

At September 30, 2018, the Company had $45.0 million in outstanding debt and $6.5 million in deferred payment in-kind interest and was in compliance with all financial covenants under the CRG Term Loan.      

14


6.

Commitments and Contingencies

Operating Leases

The Company leases office space in Oakwood Village, Ohio and Mountain View, California under noncancelable operating lease agreements. The Company leases and occupies approximately 19,800 square feet of office space in Oakwood Village, Ohio, which expires on October 31, 2019, with an option to extend the term through October 31, 2021.

In June 2014, the Company entered into an office lease agreement to lease approximately 25,500 square feet of office space located in Mountain View, California, which expires on November 30, 2019. In June 2018, the Company entered into an amendment to extend the term of the lease agreement through July 31, 2025.

In April 2018, the Company entered into a lease agreement to lease approximately 24,600 square feet of additional office space located in Mountain View, California. The lease expires on the seventh anniversary of the commencement date, and the Company has the option to extend the term of the lease for a period of up to five years.

At September 30, 2018, the future minimum payments for the operating leases were as follows (in thousands):

 

Year Ending December 31,

 

Future   Minimum

Payments

 

The remainder of 2018

 

$

322

 

2019

 

 

2,039

 

2020

 

 

2,321

 

2021

 

 

2,391

 

2022

 

 

2,463

 

Thereafter

 

 

6,709

 

Total future minimum payments

 

$

16,245

 

Legal Proceedings

In the normal course of business, the Company may become involved in legal proceedings. The Company will accrue a liability for legal proceedings when it is probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. At September 30, 2018 and December 31, 2017, the Company was not involved in any material legal proceedings.

Purchase Commitments

At September 30, 2018 and December 31, 2017, the Company had no outstanding firm purchase commitments.

7.

Distribution Agreement

In connection with the distribution agreement entered into in December 2014, between the Company and Itochu Corporation, or Itochu, the Company received a distribution fee of $4.0 million in three installments from Itochu for serving as the Company’s exclusive distributor for the sale and delivery of its MRIdian systems within Japan. In August 2016, the Company started recognizing distribution rights revenue ratably over the remaining term of the exclusive distribution agreement of approximately 8.5 years. A time-elapsed method is used to measure progress because control is transferred evenly over the remaining contractual period. The distribution rights revenue was $118 thousand for each of the three months ended September 30, 2018 and 2017, and $356 thousand for each of the nine months ended September 30, 2018, and 2017.  

8.

Equity Financing

Public Offering Of Common Stock

On August 14, 2018, the Company entered into an underwriting agreement with Morgan Stanley & Co. LLC and Jefferies LLC, as representatives of several underwriters, or the “Underwriters”, in connection with the issuance and sale of 16,216,217 shares of the Company’s common stock at a public offering price of $9.25 per share. In addition, the Company granted the Underwriters a 30-day option to purchase up to 2,432,432 additional shares of common stock on the same terms, which the Underwriters exercised in full. The Company completed the offering on August 17, 2018 under which it received aggregate net proceeds of approximately $161.9 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

15


Direct Registered Offerings

In October 2017, the Company entered into securities purchase agreements pursuant to which it sold an aggregate of 8,382,643 shares of its common stock for total gross proceeds of $49.9 million, or the October 2017 Direct Registered Offering. The October 2017 Direct Registered Offering was closed on October 25, 2017.

In February 2018, the Company entered into a securities purchase agreement pursuant to which it sold (i) 4,090,000 shares of its common stock; (ii) 3,000,581 shares of its Series A convertible preferred stock and (iii) warrants to purchase 1,418,116 shares of its common stock, or the 2018 Offering Warrants, for total gross proceeds of $59.1 million, or the March 2018 Direct Registered Offering. The March 2018 Direct Registered Offering was closed on March 5, 2018. The 2018 Offering Warrants have an exercise price of $8.31 per share, became exercisable upon issuance and expire in March 2025.

Private Placements

In January 2017, the Company completed the closing of a private placement offering, or the 2017 Private Placement, through which it sold (i) 8,602,589 shares of its common stock and (ii) warrants that provide the warrant holders the right to purchase 1,720,512 shares of its common stock, or the 2017 Placement Warrants, and raised total gross proceeds of $26.1 million. The 2017 Placement Warrants have an exercise price of $3.17 per share, became exercisable in July 2017 and expire in January 2024.

At-The-Market Offering of Common Stock

In January 2017, the Company filed a shelf registration statement on Form S-3 with the SEC, which included a base prospectus covering the offering, issuance and sale of up to a maximum aggregate offering of $75.0 million of the Company’s common stock, preferred stock, debt securities, warrants, purchase contracts and/or units. In January and April 2017, the Company agreed to sell up to a cumulative $50.0 million of its common stock in accordance with the terms of a sales agreement with FBR Capital Markets & Co. , pursuant to an at-the-market offering program in accordance with Rule 415(a)(4) under the Securities Act.

During the nine months ended September 30, 2018, the Company sold an aggregate of 33,097 shares of its common stock at an average market price of $8.41 per share, resulting in aggregate gross proceeds of approximately $0.3 million.

9.

Convertible Preferred Stock

In March 2018, the Company issued 3,000,581 shares of Series A convertible preferred stock to an existing investor through the March 2018 Direct Registered Offering at a price of $8.31 per share (see Note 8). At the date of the financing, because the effective conversion rate of the preferred stock was less than the market value of the Company’s common stock, a beneficial conversion feature of $2.7 million has been recorded as a discount to the convertible preferred stock and an increase to additional paid in capital. Because the preferred stock was perpetual and convertible at the option of the holder at any time, the Company fully amortized the discount related to the beneficial conversion feature as a deemed dividend which was recognized as an increase to accumulated deficit and net loss attributable to common stockholders. Effective on April 19, 2018, all outstanding shares of Series A convertible preferred stock were converted into shares of common stock at a conversion ratio of 1:1. Further, in May 2018, the Company filed a Certificate of Elimination of the Series A Convertible Preferred Stock de-authorizing the 3,000,581 shares of Series A convertible preferred stock. The Company had no outstanding preferred stock as of September 30, 2018.

10.

Warrants

Equity Classified Common Stock Warrants

In connection with a debt financing in December 2013, the Company issued warrants to purchase 128,231 shares of its common stock with an exercise price of $5.84 per share. These warrants are exercisable any time at the option of the holder until December 16, 2023. None of these warrants have been exercised to date and they all remained outstanding at September 30, 2018.

In connection with the merger of the Company and ViewRay Technologies, Inc. in July 2015, or the Merger, in July and August 2015, the Company conducted a private placement offering during which the Company issued warrants, or the 2015 Placement Warrants, that provide the warrant holder the right to purchase 198,760 shares of common stock at an exercise price of $5.00 per share. The 2015 Placement Warrants are exercisable at any time at the option of the holder until   the five-year anniversary of its date of issuance . During the nine months ended September 30, 2018, the Company issued 92,487 shares of its common stock upon the net exercise of 159,010 shares of the 2015 Placements Warrants. The remaining 39,750 shares of the 2015 Placement Warrants have not been exercised and remained outstanding at September 30, 2018.

In connection with the March 2018 Direct Registered Offering, the Company issued warrants to purchase 1,418,116 shares of common stock at an exercise price of $8.31 per share, or the 2018 Offering Warrants. The 2018 Offering Warrants became exercisable upon issuance and expire in March 2025. None of the 2018 Offering Warrants have been exercised to date and they all remained outstanding at September 30, 2018.

16


As separate clas ses of securities were issued in a bundled transaction, the gross proceeds from the March 2018 Direct Registered Offering of $59.1 million was allocated to common stock, Series A convertible preferred stock and the 2018 Offering Warrants based on their res pective relative fair value upon issuance. The aggregate fair value of the 2018 Offering Warrants of $7.4 million was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected term of seven years, expe cted volatility of 62.5%, risk-free interest rate of 2.8% and expected dividend yield of 0%. The allocated proceeds from the 2018 Offering Warrants of $6.6 million was recorded in additional paid-in-capital.

Liability Classified Common Stock Warrants

In connection with private placement offerings in 2017 and 2016, the Company issued common stock warrants, or the 2017 and 2016 Placement Warrants, which contain protection whereby the warrants holders will have the right to receive cash in the amount equal to the Black-Scholes value of the warrants upon the occurrence of a Change of Control, as defined in the 2017 and 2016 Placement Warrants. The 2017 and 2016 Placement Warrants were accounted for as a liability at the date of issuance and are adjusted to fair value at each balance sheet date, with the change in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The key terms of the 2017 and 2016 Placement Warrants are as follows:    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance Date

 

Term

 

Exercise Price Per Share

 

 

Warrants Exercised during the Nine Months Ended September 30, 2018

 

 

Warrants Outstanding at September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017 Placement Warrants

 

January 2017

 

7 years

 

$

3.17

 

 

 

 

 

 

1,711,123

 

 

2016 Placement Warrants

 

August and September 2016

 

7 years

 

$

2.95

 

 

 

44,183

 

 

 

1,311,458

 

 

   Total

 

 

 

 

 

 

 

 

 

 

44,183

 

 

 

3,022,581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three and nine months ended September 30, 2018, the Company recorded a loss of $6.7 million and a gain of $0.4 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. During the three and nine months ended September 30, 2017, the Company recorded a gain of $2.3 million and a loss of $6.7 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. The fair value of the 2016 and 2017 Placement Warrants at September 30, 2018 and December 31, 2017, respectively, was estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions:

 

 

 

2017 Placement Warrants

 

 

2016 Placement Warrants

 

 

 

September 30,

2018

 

 

December 31,

2017

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expected term (in years)

 

 

5.3

 

 

 

6.1

 

 

4.9

 

 

 

5.7

 

Expected volatility

 

59.6%

 

 

62.3%

 

 

59.7%

 

 

62.1%

 

Risk-free interest rate

 

3.0%

 

 

2.3%

 

 

2.9%

 

 

2.2%

 

Expected dividend yield

 

0%

 

 

0%

 

 

0

 

 

0%

 

17


11.

Stock-Based Compensation

A summary of the Company’s stock option activity and related information is as follows:

 

 

 

 

 

 

 

Options Outstanding

 

 

 

Shares

Available

for Grant

 

 

Number

of Stock

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual Life

(Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Balance at December 31, 2017

 

 

969,783

 

 

 

8,592,747

 

 

$

3.69

 

 

 

7.4

 

 

$

47,864

 

Additional options authorized

 

 

8,326,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(5,716,505

)

 

 

5,716,505

 

 

 

8.66

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

(1,607,108

)

 

 

2.22

 

 

 

 

 

 

 

 

 

Options canceled

 

 

801,933

 

 

 

(801,933

)

 

 

6.00

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

(1,767,542

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

 

2,613,827

 

 

 

11,900,211

 

 

$

6.12

 

 

 

7.3

 

 

$

39,509

 

Vested and exercisable at September 30, 2018

 

 

 

 

 

 

4,731,731

 

 

$

3.57

 

 

 

5.1

 

 

$

27,404

 

Vested and expected to vest at September 30, 2018

 

 

 

 

 

 

11,397,852

 

 

$

6.06

 

 

 

7.2

 

 

$

38,576

 

 

The weighted-average grant date fair value of options granted to employees was $5.02 and $3.18 per share during the nine months ended September 30, 2018 and 2017, respectively. The grant date fair value of options vested was $4.3 million and $2.9 million during the nine months ended September 30, 2018 and 2017, respectively.

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $11.6 million and $1.8 million during the nine months ended September 30, 2018 and 2017, respectively.

At September 30, 2018, total unrecognized compensation cost related to stock options granted to employees, net of estimated forfeitures, was $28.9 million which is expected to be recognized over a weighted-average period of 3.3 years.

Determination of Fair Value

The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the estimated fair value of the Company’s common stock, as well as assumptions regarding a number of complex and subjective variables. The variables used to calculate the fair value of stock options using the Black-Scholes option-pricing model include actual and projected employee stock option exercise behaviors, expected price volatility of the Company’s common stock, the risk-free interest rate and expected dividends. Each of these inputs is subjective and generally requires significant judgment to determine.

The fair value of employee stock option is estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:  

 

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Expected volatility%

 

60.4%

 

 

66.9%

 

Risk-free interest rate%

 

2.8%

 

 

2.1%

 

Expected dividend yield%

 

 

0.0%

 

 

 

0.0%

 

Restricted Stock Units

From time to time, the Company grants Restricted Stock Units, or RSUs, to its board of directors for their services. These RSUs are either fully vested upon issuance or vest over a period of time from the grant date and will be released and settled upon termination of the board member’s services or the occurrence of a change in control event. In November 2017, the Company granted RSUs to one executive officer upon his termination, and these RSUs were fully vested upon issuance. In July 2018, the Company granted RSUs to two new executive officers, and these RSUs vest in equal annual installments over three years from the grant date. The fair value of RSUs is based on the closing market price of the Company’s common stock on the grant date.

 

18


 

 

RSUs

 

 

 

 

Number of Shares

 

 

Weighted Average Grant Date Fair Value

 

 

Unvested at December 31, 2017

 

 

 

 

$

 

 

RSUs granted

 

 

1,767,542

 

 

 

9.65

 

 

RSUs vested

 

 

(20,109

)

 

 

10.31

 

 

Unvested at September 30, 2018

 

 

1,747,433

 

 

$

9.64

 

 

Vested and unreleased

 

 

130,889

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

1,878,322

 

 

 

 

 

 

For the nine months ended September 30, 2018, the Company granted 1.8 million shares of RSUs, and recorded $1.2 million in stock-based compensation expense related to the issuance of RSUs. For the nine months ended September 30, 2017, no RSUs were issued and no stock-based compensation expense was recorded related to RSUs.

As of September 30, 2018, total unrecognized stock-based compensation cost related to RSUs was $14.6 million, which is expected to be recognized over a weighted-average period of 2.8 years. As of September 30, 2018, 1,627,261 shares of RSUs are expected to vest.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and comprehensive loss is classified as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

511

 

 

$

221

 

 

$

1,061

 

 

$

602

 

Selling and marketing

 

 

234

 

 

 

70

 

 

 

555

 

 

 

193

 

General and administrative

 

 

6,434

 

 

 

693

 

 

 

8,436

 

 

 

1,971

 

Total stock-based compensation expense

 

$

7,179

 

 

$

984

 

 

$

10,052

 

 

$

2,766

 

During the three and nine months ended September 30, 2018 and 2017, there was no stock-based compensation expense capitalized as a component of inventory or recognized in cost of revenue. Stock-based compensation relating to stock-based awards granted to consultants was insignificant during the three and nine months ended September 30, 2018 and 2017.

 

Modification of Certain Stock-based Awards

 

In connection with the resignation of certain key executives during the third quarter of fiscal year 2018, the Company entered into separation and consulting agreements with each resigning executive. Pursuant to their separation and consulting agreements, the individuals will continue to vest in any unvested equity awards that would otherwise have vested in up to the twelve-month period, for one individual, and the six-month period, for the other two individuals, following their respective termination dates. The modification of the original option agreements resulted in total incremental stock-based compensation expense of $3.7 million, which was recognized upon the respective termination dates during the third quarter of fiscal 2018.

12.

Income Tax

The Tax Cuts and Jobs Act, or the 2017 Tax Act, was enacted on December 22, 2017. Among various provisions, the 2017 Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. As such, the Company’s 2017 financial results reflected the income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 was complete and provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 was incomplete, but a reasonable estimate could be determined. Upon completion of our 2017 U.S. income tax return in the current year, we may identify additional remeasurement adjustments to our recorded deferred tax assets. We will continue to assess our provision for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in SAB 118. For the quarter ended September 30, 2018, we have not made any adjustments to the provisional amounts recorded at December 31, 2017.

19


Due to the current operating losses, the Company recorded zero income tax expense during the nine months ended September 30, 2018 and 2017, respectively. During these periods, the Company’s activities were limited to U.S. federal and state tax jurisdictions, as it does not have any foreign operations. The federal and state effective tax rate before valuation allowance is approximately 22% for the nine mont hs ended September 30, 2018.

Due to the Company’s history of cumulative losses, management concluded that, after considering all the available objective evidence, it is not more likely than not that all of the Company’s net deferred tax assets will be realized. Accordingly, the Company’s deferred tax assets, which includes net operating loss, or NOL, carryforwards and tax credits related primarily to research and development continue to be subject to a valuation allowance as of September 30, 2018. The Company expects to continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.      

The Company had unrecognized tax benefits of $1.5 million and $1.1 million at September 30, 2018 and December 31, 2017, respectively. The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.  

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense. At September 30, 2018, and December 31, 2017, there were no accrued interest and penalties related to uncertain tax positions.  

13.

Net Loss per Share

Since the Company was in a loss position for all periods presented, diluted net loss per common share is the same as basic net loss per common share for all periods presented, because the inclusion of all potential common shares outstanding would have an anti-dilutive effect. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share for the periods presented, because including them would have an anti-dilutive effect:

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

2018

 

 

2017

 

Series A convertible preferred stock (if converted)

 

 

 

 

 

 

 

494,601

 

 

 

 

Options to purchase common stock

 

 

11,769,686

 

 

 

8,099,577

 

 

10,028,174

 

 

 

7,741,118

 

Common stock warrants

 

 

4,694,837

 

 

 

3,428,248

 

 

4,441,885

 

 

 

3,321,110

 

Restricted stock units

 

 

1,457,638

 

 

 

93,614

 

 

576,464

 

 

 

105,493

 

Total

 

 

17,922,161

 

 

 

11,621,439

 

 

15,541,124

 

 

 

11,167,721

 

14.

Related Party Transactions

In December 2004, the Company entered into a licensing agreement with the University of Florida Research Foundation, or UFRF, whereby UFRF granted the Company a worldwide exclusive license to certain of UFRF’s patents in exchange for 33,652 shares of common stock and a 1% royalty, with a minimum $50,000 royalty payment per quarter, from sales of products developed and sold by the Company utilizing the licensed patents.  

In January 2017, the Company entered into a sales consulting agreement with Puissance Capital Management, or PCM, to assist with business development activities in a key market in Asia. PCM is the investment manager of Puissance Cross Board Opportunities LLP, a stockholder in the Company. Theodore T. Wang, Ph.D., a member of the Company’s board of directors, is the managing member of the general partners of PCM. The sales consulting agreement has a term of one year with a total consideration of $1.3 million. This amount has been fully expensed in the first quarter of 2018.

 

  

20


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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2017, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report filed with the SEC on March 12, 2018. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in this Quarterly Report that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements.

Unless otherwise indicated, references in this section to “ViewRay,” “we,” “us,” “our” and “the Company” refer to ViewRay, Inc. and its consolidated subsidiary, ViewRay Technologies, Inc.

As a result of the merger of the Company and ViewRay Technologies, Inc. in July 2015, or the Merger, and the change in business and operations of the Company, a discussion of the past financial results of the Company is not pertinent, and under applicable accounting principles the historical financial results of ViewRay Technologies, Inc., the accounting acquirer, prior to the Merger are considered the historical financial results of the Company.

The following discussion highlights ViewRay’s results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on ViewRay’s unaudited condensed consolidated financial statements contained in this Quarterly Report, which we have prepared in accordance with U.S. GAAP. You should read the discussion and analysis together with such condensed consolidated financial statements and the related notes thereto.

Company Overview

We design, manufacture and market the ViewRay MRIdian®. The MRIdian is an innovative system that integrates high quality radiation therapy with simultaneous magnetic resonance imaging (MRI).  There are two generations of the MRIdian: the first generation MRIdian with Cobalt-60 based radiation beams and the second generation MRIdian Linac, with more advanced linear accelerator or ‘linac’ based radiation beams.

The MRIdian combines MRI and external-beam radiation therapy to simultaneously image and treat cancer patients. MRI is a broadly used imaging tool that has the ability to clearly differentiate between types of soft tissue. In contrast, X-ray or computed tomography (CT), the most commonly used imaging technologies in radiation therapy today, are often unable to distinguish soft tissues such as the tumor and critical organs. MRIdian integrates MRI technology, radiation delivery and our proprietary software to locate, target and track soft-tissue tumors, while radiation is delivered. These capabilities allow MRIdian to deliver radiation to the tumor accurately, while reducing the radiation amount delivered to nearby healthy tissue, as compared to other radiation therapy treatments currently available. We believe this will lead to improved patient outcomes and reduced treatment-related side effects.

Both generations of the MRIdian have received 510(k) marketing clearance from the U.S. Food and Drug Administration, or FDA, and permission to affix the Conformité Européene, or CE mark.  

 

We received initial 510(k) marketing clearance from the FDA for our treatment planning and delivery software in January 2011.

 

We received 510(k) marketing clearance for MRIdian, with Cobalt-60 as the radiation source, in May 2012. We received permission to affix the CE mark to MRIdian with Cobalt-60 in November 2014, allowing MRIdian with Cobalt-60 to be sold within the European Economic Area, or EEA.   In August 2016, we received regulatory approval from the Japanese Ministry of Health, Labor and Welfare to market MRIdian with Cobalt-60 in Japan. In August 2016, we also received approval from the China Food and Drug Administration to market MRIdian with Cobalt-60 in China.  

 

In September 2016, we received the CE mark for the MRIdian Linac (with a linear accelerator as the radiation source) in the EEA. In February 2017, we received 510(k) clearance from the FDA to market MRIdian Linac. In June 2017, we received 510(k) clearance to market RayZR™, our high-resolution beam-shaping multi-leaf collimator. We also received MRIdian Linac regulatory approval in Taiwan and Canada in August 2017, and in Israel in November 2017. In March 2018, we received regulatory approval from the Japanese Ministry of Health, Labor and Welfare to market MRIdian Linac in Japan. We are also seeking required MRIdian Linac approvals in other countries such as China.

 

21


MRIdian is the first radiation therapy solution that enables simultaneous radiation treatment delivery and real-time MRI imaging of a patient’s internal anatomy.  It generates high-quality images that differentiate between the targeted tumor, surrounding soft tissue and nearby critical organs. MRIdian also records the level of radiation dose that the treatment area has received, enabling physicians to adapt the prescription betw een treatments, as needed. We believe this improved visualization and accurate dose delivery will enable better treatment, improve patient outcomes and reduce side effects.  Key benefits to users and patients include: improved imaging and patient alignment ; the ability to adapt the patient’s radiation treatments to changes while the patient is still on the treatment table, or “on-table adaptive treatment planning”; MRI-based motion management; and an accurate recording of the delivered radiation dose.  Phys icians have used MRIdian to treat a broad spectrum of radiation therapy patients with more than 45 different types of cancer, as well as patients for whom radiation therapy was previously not an option.

At September 30, 2018, we had eight MRIdian with Cobalt-60 systems and thirteen MRIdian Linac systems at nineteen cancer centers worldwide (nine in the United States and ten outside the United States). Four MRIdian Linacs have been delivered and are expected to be installed in 2018 and 2019.

We currently market MRIdian through a direct sales force in North America and are developing a sales force to assist distributors in the rest of the world. We market MRIdian to a broad range of worldwide customers, including university research and teaching hospitals, community hospitals, private practices, government institutions and freestanding cancer centers. As with the traditional linac market, our sales and revenue cycle vary based on the particular customer and can be lengthy, sometimes lasting up to 18 to 24 months (or more) from initial customer contact to order contract execution. Following execution of a sales contract, it generally takes nine to 12 months for a customer to customize an existing facility or construct a new vault. Upon the commencement of installation at a customer’s facility, it typically takes approximately 90 days for us to install MRIdian and perform on-site testing of the system, including the completion of acceptance test procedures .

We generated total revenue of $17.7 million and $12.2 million, and had net losses of $32.9 million and $11.2 million, during the three months ended September 30, 2018 and 2017, respectively. We generated total revenue of $60.3 million and $14.1 million, and net losses of $59.7 million and $47.5 million, during the nine months ended September 30, 2018 and 2017, respectively.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

add personnel to support our product development and commercialization efforts;

 

continue our research and development efforts;

 

seek regulatory approval for MRIdian in certain foreign countries; and

 

operate as a public company.

Accordingly, we may seek to fund our operations through public or private equity, debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop enhancements to and integrate new technologies into MR Image-Guided radiation therapy systems .

New Orders and Backlog

New orders are defined as the sum of gross product orders, representing MRIdian contract price, recorded during the period. Backlog is the accumulation of all orders for which revenue has not been recognized and which we consider valid. Backlog includes customer deposits or letters of credit, except when the sale is to a customer where a deposit is not deemed necessary or customary. Deposits received are recorded as customer deposit, which is a liability on the balance sheet. Orders may be revised or cancelled according to their terms or upon mutual agreement between the parties. Therefore, it is difficult to predict with certainty the amount of backlog that will ultimately result in revenue. The determination of backlog includes objective and subjective judgment about the likelihood of an order contract becoming revenue. We perform a quarterly review of backlog to verify that outstanding orders in backlog remain valid, and based upon this review, orders that are no longer expected to result in revenue are removed from backlog. Among other criteria we use to determine whether a transaction to be in backlog, we must possess both an outstanding and effective written agreement for the delivery of a MRIdian signed by a customer with a minimum customer deposit or a letter of credit requirement, except when the sale is to a customer where a deposit is not deemed necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, sales via tender awards, or indirect channel sales that have signed contracts with end-customers). We decide whether to remove or add back an order from or to our backlog by evaluating the following criteria: changes in customer or distributor plans or financial conditions; the customer’s or distributor’s continued intent and ability to fulfill the order contract; changes to regulatory requirements; the status of regulatory approval required in the customer’s jurisdiction, if any; and other reasons for potential cancellation of order contracts.

During the nine months ended September 30, 2018, we received new orders for MRIdian systems totaling $92.0 million. At September 30, 2018, we had total backlog of $200.9 million.

22


Components of Statements of Operations

Revenue

Product Revenue. Product revenue consists of revenue recognized from sales of MRIdian systems, as well as optional components, such as additional planning workstations and body coils .

Following execution of a sales contract, it generally takes nine to 12 months for a customer to customize an existing facility or construct a new vault for the purchased system. Upon the commencement of installation at a customer’s facility, it typically takes approximately 90 days to complete the installation and on-site testing of the system, including the completion of acceptance test procedures. On-site training takes approximately one week and can be conducted concurrently with installation and acceptance testing. Sales contracts generally include customer deposits upon execution of the agreement, and in certain cases, additional amounts due at shipment or commencement of installation, and final payment due generally upon customer acceptance.

Revenue recognition for MRIdian systems that we install generally occurs when the customer acknowledges that the system operates in accordance with standard product specifications, the customer accepts the installed unit and the control of the system is transferred to the customer. For sales of MRIdian systems for which we are not responsible for installation, revenue is recognized when the entire system is delivered and the control of the system is transferred to the customer.

Service Revenue. Our contracts typically include service warranty at no additional costs for one to two years. In addition, we offer multi-year, post-installation maintenance and support contracts that provide various levels of service support, which enables our customers to select the level of on-going support services, including parts and labor, which they require. These post-installation contracts are for a period of one to five years and provide services ranging from on-site parts and labor, and preventative maintenance to labor only with a longer response time. We also offer technology upgrades to our MRIdian systems, when and if available, for an additional fee. Service revenue is recognized ratably over the term during which the contracted services are provided .

Distribution Rights Revenue.   In December 2014, we entered into a distribution agreement with Itochu Corporation pursuant to which we appointed Itochu as our exclusive distributor for the promotion, sale and delivery of MRIdian products within Japan. In consideration of the exclusive distribution rights granted, we received $4.0 million, which was recorded as deferred revenue and since August 2016, distribution rights revenue has been recognized ratably over the remaining term of the distribution agreement, which expires in December 2024. A time-elapsed method is used to measure progress because the control is transferred evenly over the remaining contractual period.

Cost of Revenue

Product Cost of Revenue. Product cost of revenue primarily consists of the cost of materials, installation and services associated with the manufacturing and installation of MRIdian systems, as well as medical device excise tax and royalty payments to the University of Florida Research Foundation. Product cost of revenue also includes lower of cost or market inventory, or LCM, adjustments if the carrying value of the inventory is greater than its net realizable value. We recorded a LCM charge of $0.6 million for the nine months ended September 30, 2017. There was no LCM charge for the nine months ended September 30, 2018.

We expect our materials, installation and service costs to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs. We expect to continue to lower costs and increase sales prices as we transition to MRIdian Linac .  

Service Cost of Revenue. Service cost of revenue is comprised primarily of personnel costs, training and travel expenses to service and perform maintenance on installed MRIdian systems. Service cost of revenue also includes the costs of replacement parts under maintenance and support contracts .

Operating Expenses

Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel. Other significant research and development costs arise from third-party consulting services, laboratory supplies, research materials, medical equipment, computer equipment and licensed technology, and related depreciation and amortization. We expense research and development costs as incurred. As we continue to invest in improving MRIdian and developing new technologies, we expect our research and development expenses to increase .

Selling and Marketing. Selling and marketing expenses consist primarily of compensation and related costs for our direct sales force, sales management, and marketing and customer support personnel, and include stock-based compensation, employee benefits and travel expenses. Selling and marketing expenses also include costs related to trade shows and marketing programs. We expense selling and marketing costs as incurred. We expect selling and marketing expenses to increase in future periods as we expand our sales force and our marketing and customer support organizations and increase our participation in trade shows and marketing programs .

23


General and Administrative. Our general and administrative expenses consist primarily of compensation and related costs for our operations, finance, human resources, regulatory, and other adminis trative personnel, and include stock-based compensation, employee benefits and travel expenses. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, quality and regulatory functions and facilit ies costs, and gain or loss on the disposal of property and equipment. We expect our general and administrative expenses to increase as our business grows and as we invest in the development of MRIdian Linac .

Interest Income

Interest income consists primarily of interest income received on our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of interest and amortization related to our long-term debt facility entered in 2015 from Capital Royalty II L.P., Capital Royalty Partners II—Parallel Fund “A” L.P., Capital Royalty Partners II (Cayman) L.P. and Parallel Investment Opportunities Partners II L.P., or together with their successors by assignment, CRG, and such loan, the CRG Term Loan .

Other Income (Expense), Net

Other income (expense), net consists primarily of changes in the fair value of the 2017 and 2016 Placement Warrants and foreign currency exchange gains and losses.

The outstanding 2017 and 2016 Placement Warrants are re-measured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as a component of other income (expense), net.  

Results of Operations

The following tables set forth our results of operations for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

16,492

 

 

$

11,358

 

 

$

57,237

 

 

$

11,358

 

Service

 

 

1,056

 

 

 

721

 

 

 

2,706

 

 

 

2,408

 

Distribution rights

 

 

118

 

 

 

118

 

 

 

356

 

 

 

356

 

Total revenue

 

 

17,666

 

 

 

12,197

 

 

 

60,299

 

 

 

14,122

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

15,199

 

 

 

9,728

 

 

 

49,564

 

 

 

10,322

 

Service

 

 

2,103

 

 

 

484

 

 

 

4,732

 

 

 

1,758

 

Total cost of revenue

 

 

17,302

 

 

 

10,212

 

 

 

54,296

 

 

 

12,080

 

Gross margin

 

 

364

 

 

 

1,985

 

 

 

6,003

 

 

 

2,042

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,347

 

 

 

3,616

 

 

 

12,506

 

 

 

9,781

 

Selling and marketing

 

 

3,384

 

 

 

2,510

 

 

 

10,024

 

 

 

5,453

 

General and administrative

 

 

16,721

 

 

 

7,502

 

 

 

37,070

 

 

 

22,116

 

Total operating expenses:

 

 

24,452

 

 

 

13,628

 

 

 

59,600

 

 

 

37,350

 

Loss from operations

 

 

(24,088

)

 

 

(11,643

)

 

 

(53,597

)

 

 

(35,308

)

Interest income

 

 

2

 

 

 

1

 

 

 

6

 

 

 

3

 

Interest expense

 

 

(1,974

)

 

 

(1,843

)

 

 

(5,758

)

 

 

(5,372

)

Other (expense) income, net

 

 

(6,792

)

 

 

2,269

 

 

 

(307

)

 

 

(6,853

)

Loss before provision for income taxes

 

 

(32,852

)

 

 

(11,216

)

 

 

(59,656

)

 

 

(47,530

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(32,852

)

 

$

(11,216

)

 

$

(59,656

)

 

$

(47,530

)

 

24


Comparison of the Three Months Ended September 30, 2018 and 2017

Revenue

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Product

 

$

16,492

 

 

$

11,358

 

 

$

5,134

 

Service

 

 

1,056

 

 

 

721

 

 

 

335

 

Distribution rights

 

 

118

 

 

 

118

 

 

 

-

 

Total revenue

 

$

17,666

 

 

$

12,197

 

 

$

5,469

 

 

Total revenue during the three months ended September 30, 2018 increased by $5.5 million compared to the three months ended September 30, 2017. The increase was primarily due to a $5.1 million increase in product revenue and a $0.3 million increase in service revenue during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

Product Revenue. Product revenue increased by $5.1 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase was due to the revenue recognized during the three months ended September 30, 2018 from three MRIdian Linac systems, as compared to two MRIdian Linac systems during the three months ended September 30, 2017.

Service Revenue. Service revenue increased by $0.3 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 due to the increase in installed base.

Distribution Rights Revenue. Distribution rights revenue remained flat, as expected based on the ratable recognition of revenue over the term of this agreement, during the three months ended September 30, 2018 compared to the three months ended September 30, 2017.

Cost of Revenue

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Product

 

$

15,199

 

 

$

9,728

 

 

$

5,471

 

Service

 

 

2,103

 

 

 

484

 

 

 

1,619

 

Total cost of revenue

 

$

17,302

 

 

$

10,212

 

 

$

7,090

 

Product Cost of Revenue. Product cost of revenue increased by $5.5 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The increase was primarily due to the installation of three MRIdian Linac systems during the three months ended September 30, 2018, as compared to the installation of two MRIdian Linac systems during the three months ended September 30, 2017.

Service Cost of Revenue. Service cost of revenue increased by $1.6 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily due to timing of services and increase in installed base for the three months ended September 30, 2018, as well as increased headcount of field service engineers.

Operating Expenses

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

 

2,017

 

 

Change

 

 

 

(in thousands)

 

Research and development

 

$

4,347

 

 

$

3,616

 

 

$

731

 

Selling and marketing

 

 

3,384

 

 

 

2,510

 

 

 

874

 

General and administrative

 

 

16,721

 

 

 

7,502

 

 

 

9,219

 

Total operating expenses

 

$

24,452

 

 

$

13,628

 

 

$

10,824

 

25


Research and Development. Research and development expenses during the three months ended September 30, 2018 increased by $0.7 million, compared to the three months ended September 30, 2017. The increase was primarily attributab le to a $0.9 million increase in personnel expense related to an increase in headcount and a $0.2 million increase in facilities costs, partially offset by a $0.3 million decrease in outside services and a $0.2 million decrease in product development costs .

Selling and Marketing. Selling and marketing expenses during the three months ended September 30, 2018 increased by $0.9 million, compared to the three months ended September 30, 2017. This increase was primarily attributable to a $1.1 million increase in personnel expense related to an increase in headcount and a $0.2 million increase in consulting fees to support our growing sales organization, partially offset by $0.5 million decrease in marketing expense.

General and Administrative. General and administrative expenses during the three months ended September 30, 2018 increased by $9.2 million, compared to the three months ended September 30, 2017. This increase was primarily driven by $5.0 million of severance expense associated with certain terminated executives. The remaining increase was attributable to the increase in headcount, legal expense and depreciation expense.

Interest Expense

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Interest expense

 

$

(1,974

)

 

$

(1,843

)

 

$

(131

)

Interest expense increased slightly during the three months ended September 30, 2018 compared to the three months ended September 30, 2017, mainly due to the increase in loan balance under the effective interest rate method, including deferred payment in-kind interest to CRG, although the nominal loan balance remained the same during both periods.  

Other (Expense) Income, Net

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Other (expense) income, net

 

$

(6,792

)

 

$

2,269

 

 

$

(9,061

)

 

Other (expense) income, net during the three months ended September 30, 2018 consisted primarily of a $6.7 million change in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants. Other (expense) income, net during the three months ended September 30, 2017 consisted primarily of a $2.3 million change in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants.

Comparison of the Nine Months Ended September 30, 2018 and 2017

Revenue

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Product

 

$

57,237

 

 

$

11,358

 

 

$

45,879

 

Service

 

 

2,706

 

 

 

2,408

 

 

 

298

 

Distribution rights

 

 

356

 

 

 

356

 

 

 

-

 

Total revenue

 

$

60,299

 

 

$

14,122

 

 

$

46,177

 

 

Total revenue during the nine months ended September 30, 2018 increased by $46.2 million compared to the nine months ended September 30, 2017. The increase was primarily due to a $45.9 million increase in product revenue during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

Product Revenue. Product revenue during the nine months ended September 30, 2018 increased by $45.9 million compared to the nine months ended September 30, 2017. The increase was due to the revenue recognized related to the delivery and installation of ten MRIdian Linac systems and one system upgrade during the nine months ended September 30, 2018 as compared to two MRIdian Linac systems during the nine months ended September 30, 2017.

26


Service Revenue. Service revenue increased slightly during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to the increase in installed base.

Distribution Rights Revenue. Distribution rights revenue remained flat, as expected based on the ratable recognition of revenue over the term of this agreement, during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

Cost of Revenue

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Product

 

$

49,564

 

 

$

10,322

 

 

$

39,242

 

Service

 

 

4,732

 

 

 

1,758

 

 

 

2,974

 

Total cost of revenue

 

$

54,296

 

 

$

12,080

 

 

$

42,216

 

Product Cost of Revenue. Product cost of revenue increased by $39.2 million during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase was primarily due to the delivery and installation of ten MRIdian Linac systems and one system upgrade and write down of $2.9 million of MRIdian Cobalt related inventory and deposits on purchased inventory during the nine months ended September 30, 2018, as compared to the installations of two MRIdian Linac systems during the nine months ended September 30, 2017.

Service Cost of Revenue. Service cost of revenue increased by $3.0 million during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to timing of services combined with the increase in installed base during the nine months ended September 30, 2018, as well as increased headcount of field service engineers.

Operating Expenses

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Research and development

 

$

12,506

 

 

$

9,781

 

 

$

2,725

 

Selling and marketing

 

 

10,024

 

 

 

5,453

 

 

 

4,571

 

General and administrative

 

 

37,070

 

 

 

22,116

 

 

 

14,954

 

Total operating expenses

 

$

59,600

 

 

$

37,350

 

 

$

22,250

 

Research and Development. Research and development expenses during the nine months ended September 30, 2018 increased by $2.7 million, compared to the nine months ended September 30, 2017. The increase was primarily attributable to a $2.0 million increase in personnel expense related to an increase in headcount, a $0.6 million increase in facilities costs and a $0.3 million increase in travel expense. This increase was partially offset by a $0.3 million decrease in outside service costs.

Selling and Marketing. Selling and marketing expenses during the nine months ended September 30, 2018 increased by $4.6 million compared to the nine months ended September 30, 2017. The increase was primarily attributable to a $4.0 million increase in personnel expense related to an increase in headcount, a $0.4 million increase in travel expenses and a $0.4 million increase in consulting fees to support our growing sales organization. This increase was partially offset by a $0.4 million decrease in marketing expense.

General and Administrative. General and administrative expenses during the nine months ended September 30, 2018 increased by $15.0 million compared to the nine months ended September 30, 2017. This increase was primarily driven by $5.0 million of severance expense associated with certain terminated executives. The remaining increase was attributable to the increase in headcount, legal expense and depreciation expense.

 

27


Interest Expense

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Interest expense

 

$

(5,758

)

 

$

(5,372

)

 

$

(386

)

Interest expense increased slightly during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, mainly due to the increase in loan balance under the effective interest rate method, including deferred payment in-kind interest to CRG, although the nominal loan balance remained the same during both periods.   

Other (Expense) Income, Net

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

(in thousands)

 

Other (expense) Income, net

 

$

(307

)

 

$

(6,853

)

 

$

6,546

 

Other (expense) income, net during the nine months ended September 30, 2018 consisted primarily of a $0.4 million change in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants. Other (expense) income, net during the nine months ended September 30, 2017 consisted primarily of a $6.7 million change in the fair value of warrant liability related to the 2017 and 2016 Placement Warrants.

Liquidity and Capital Resources

Since our inception in 2004, we have incurred significant net losses and negative cash flows from operations. During the nine months ended September 30, 2018 and 2017, we had net losses of $59.7 million and $47.5 million, respectively. At September 30, 2018 and December 31, 2017, we had an accumulated deficit of $382.2 million and $319.9 million, respectively.

At September 30, 2018 and December 31, 2017, we had cash and cash equivalents of $201.5 million and $57.4 million, respectively. To date, we have financed our operations principally through offerings of our capital stock, issuances of warrants, issuances of convertible promissory notes, use of term loans and receipts of customer deposits for new orders and payments from customers for systems installed and delivered. We may, from time to time, seek to raise capital through a variety of sources, including the public equity market, private equity financing, and public or private debt. In January 2017, we issued common stock and warrants to purchase common stock via the 2017 Private Placement for gross proceeds of $26.1 million. In 2017, we also raised aggregate gross proceeds of $40.1 million through our at-the-market offering program under which we sold approximately 6.6 million shares of our common stock at an average sale price of $6.10 per share. In October 2017, we issued common stock in the October 2017 Direct Registered Offering for gross proceeds of $49.9 million. In March 2018, we issued common stock, Series A convertible preferred stock and warrants to purchase common stock in the March 2018 Direct Registered Offering for gross proceeds of $59.1 million. In May 2018, we raised additional aggregate gross proceeds of $0.3 million through our at-the-market offering program under which we sold 33,097 shares of our common stock at an average sale price of $8.41 per share. In August 2018, we raised aggregate gross proceeds of $172.5 million via a public offering, in which we sold approximately 18.6 million shares of our common stock at a price of $9.25 per share. We expect that our existing cash and cash equivalents, together with the sales of MRIdian systems will enable us to conduct our planned operations for at least the next 12 months.  

We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future operating needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors.”

The following table summarizes our cash flows for the periods presented (in thousands):

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Cash used in operating activities

 

$

(77,429

)

 

$

(43,694

)

Cash used in investing activities

 

$

(2,814

)

 

$

(1,117

)

Cash provided by financing activities

 

$

224,635

 

 

$

65,026

 

28


Operating Activities

We have historically experienced negative cash outflows as we developed MRIdian with Cobalt-60 systems, MRIdian Linac and expanded our business.  Our primary source of cash flow from operating activities is cash receipts from customers including sales of MRIdian systems and, to a lesser extent, up-front payments from customers. Our primary uses of cash in operating activities are amounts due to vendors for purchased components and employee-related expenditures.

During the nine months ended September 30, 2018, cash used in operating activities was $77.4 million, as a result of our net loss of $59.7 million, a $33.0 million net change in our operating assets and liabilities, and the aggregate non-cash charges of $15.3 million. The net change in our operating assets and liabilities was primarily a result of a change in inventory, customer deposits and deferred revenue, accounts payable, accounts receivable and prepaid expenses and other assets, which was partially offset by changes in accrued expenses and other long-term liabilities, deferred cost of revenue and deposits on purchased inventory. Inventory increased $22.4 million, in anticipation of upcoming shipments and installations of MRIdian systems. Customer deposits and deferred revenue decreased $12.4 million as a result of revenue recognized for the ten units of MRIdian system sales and one unit of system upgrade partially offset by additional accrual for the units currently being installed in the first nine months of 2018. Accounts payable decreased $4.1 million resulting from the timing of payment. Accounts receivable increased by $2.4 million resulting from the timing of collections. Prepaid expenses and other assets increased $2.3 million mainly due to prepayments made for insurance premiums and deferred sales commissions. The net change in our operating assets and liabilities were partially offset by a $6.7 million increase in accrued expense and other liabilities mainly resulting from accrued tax liabilities and accrued interest for the CRG Term Loan, a $2.3 million decrease in deferred cost of revenue primarily due to the revenue recognized for MRIdian systems for the nine months ended September 30, 2018, partially offset by the shipment of additional components for MRIdian systems currently being installed , and a $1.5 million decrease in deposits on purchased inventory due to the receipt of inventory previously paid for as deposits. Non-cash charges included $10.1 million of stock-based compensation expense, $2.7 million of amortization of debt discount and interest accrual related to the CRG Term Loan, and $2.6 million of depreciation and amortization expense, offset by a $0.1 million gain related to the change in fair value of the 2017 and 2016 Placement Warrants.

During the nine months ended September 30, 2017, cash used in operating activities was $43.7 million as a result of our net loss of $47.5 million and a $10.4 million net change in our operating assets and liabilities, partially offset by aggregate non-cash charges of $14.2 million. The net change in our operating assets and liabilities was primarily a result of an increase in inventory and deposits on purchased inventory, an increase in deferred cost of revenue, and an increase in prepaid expenses and other assets, partially offset by an increase in customer deposits and deferred revenue, an increase in accounts payable, a decrease in accounts receivable, and an increase in accrued expenses and other long-term liabilities. Inventory and deposits on purchased inventory increased $11.1 million and $3.6 million, respectively, in anticipation of upcoming shipments and installations of MRIdian systems. Deferred cost of revenue increased $6.5 million due to the shipment of additional components for MRIdian systems currently being installed. Prepaid expenses and other assets increased $2.1 million, primarily attributable to deferred sales commissions on new sales contracts and prepaid consulting fees. The net change in our operating assets and liabilities were partially offset by a $5.2 million increase in customer deposits and deferred revenue mainly due to deposits received from new sales contracts in the first nine months of 2017. The $2.1 million increase in accounts payable and the $3.2 million decrease in accounts receivable resulted from the timing of payment and collections. The $2.5 million increase in accrued expenses and other long-term liabilities was due primarily to the timing of invoice receipts for services and inventory purchased. Non-cash charges included a $6.7 million change in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants, $2.5 million of amortization of debt discount and interest accrual related to the CRG Term Loan, $2.8 million of stock-based compensation expense, $1.6 million of depreciation and amortization expense as well as a $0.6 million charge due to LCM adjustments related to the reduction of carrying value of inventory to its net realizable value.

Investing Activities

Cash used in investing activities of $2.8 million and $1.1 million during the nine months ended September 30, 2018 and 2017, respectively, resulted from capital expenditures to purchase property and equipment.

Financing Activities

During the nine months ended September 30, 2018, financing activities provided $224.6 million in cash, consisting of $172.5 million in gross proceeds from the August 2018 Public Offering of Common Stock, $59.1 million gross proceeds from the March 2018 Direct Registered Offering, $0.3 million gross proceeds from our at-the-market offering program and $3.6 million proceeds from the exercise of stock options, partially offset by offering costs of $10.6 million for the August 2018 Public Offering of Common Stock and $0.2 million for the March 2018 Direct Registered Offering.

During the nine months ended September 30, 2017, financing activities provided $65.0 million in cash consisting of $26.1 million gross proceeds from the 2017 Private Placement, $40.1 million gross proceeds from our at-the-market offering program and $0.2 million from the exercise of stock options, partially offset by offering costs of $1.1 million for our at-the-market offering program and offering costs of $0.3 million for our 2017 and 2016 Private Placements.

29


CRG Term Loan

In June 2015, we entered into the CRG Term Loan for up to $50.0 million, of which $30.0 million was made available to us upon closing and the remaining $20.0 million would be available on or before June 30, 2016 upon the achievement of certain milestones. We drew down the first $30.0 million on the closing date in June 2015.  In March 2016, the CRG Term Loan was amended with regard to the conditions for borrowing the remaining $20.0 million available. We achieved one milestone at March 31, 2016 and borrowed an additional $15.0 million in May 2016. In April 2017, we executed an amendment to the CRG Term Loan, which included an extension to the availability of the existing $5.0 million tranche at our option through June 30, 2017, added a $15.0 million tranche of borrowing capacity available at our option through September 30, 2017, extended the interest-only and payment in-kind period, decreased the combined 2016 and 2017 revenue covenant and included a 1.75% increase to the facility fee. In October 2017, we executed another amendment to the CRG Term Loan, extending the availability of the existing $15.0 million borrowing capacity through December 31, 2017. We did not draw down any amount under the $5.0 million or the $15.0 million tranches and they have since expired. In February 2018, the CRG Term Loan was amended to decrease the amount of the minimum combined 2016 and 2017 revenue covenant effective December 31, 2017. The CRG Term Loan is subject to financial covenants and is collateralized by essentially all our assets and limits our ability with respect to additional indebtedness, investments or dividends, among other things, subject to customary exceptions.

At September 30, 2018, we had $45.0 million in outstanding debt to CRG, which is repayable through June 30, 2020. The CRG Term Loan bears cash interest at a rate of 12.5% per annum and has an interest-payment-only period through March 31, 2020. We were in compliance with all financial covenants under the CRG Term Loan at September 30, 2018. Additional details regarding the CRG Term Loan are included in the section entitled “Notes to Condensed Consolidated Financial Statements – Note 5 – Debt” in the condensed consolidated financial statements.

2017 Private Placement

In January 2017, we entered into a securities purchase agreement pursuant to which we sold an aggregate of 10,323,101 shares of common stock which consists of 8,602,589 shares of common stock and warrants to purchase 1,720,512 shares of common stock, or the 2017 Placement Warrants, for total gross proceeds of $26.1 million, or the 2017 Private Placement. We completed the closing of the 2017 Private Placement on January 18, 2017.  The 2017 Placement Warrants have a per share exercise price of $3.17, are exercisable after nine months and expire seven years from the date of issuance.

At-The-Market Offering of Common Stock

In January 2017, we filed a registration statement with the SEC which covers the offering, issuance and sale by the registrant of up to a maximum aggregate offering price of $75.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units; and we entered into a sales agreement with FBR Capital Markets & Co., or FBR, under which we may sell up to $25.0 million of our common shares pursuant to an at-the-market offering program in accordance with Rule 415(a)(4) under the Securities Act . FBR acted as sales agent on a best efforts basis and used commercially reasonable efforts to sell on our behalf all of the shares of common stock requested to be sold by us, consistent with its normal trading and sales practices, on mutually agreed terms between FBR and us. There is no arrangement for funds to be received in any escrow, trust or similar arrangement. In April 2017, we agreed to sell up to an additional $25.0 million of our common stock in accordance with the terms of a sales agreement with FBR and pursuant to an at- the-market offering program in accordance with Rule 415(a)(4) under the Securities Act .

FBR is entitled to compensation of up to 3.0% of the gross sales price per share sold. In connection with the sale of our common stock on our behalf, FBR is deemed to be an “underwriter” within the meaning of the Securities Act and the compensation of FBR is deemed to be underwriting commissions or discounts. We have also agreed to provide indemnification and contribution to FBR with respect to certain liabilities, including liabilities under the Securities Act.

During fiscal year 2017, we sold an aggregate of approximately 6.6 million shares of our common stock at an average market price of $6.10 per share under the at-the-market offering program, resulting in aggregate gross proceeds of approximately $40.1 million. During the nine months ended September 30, 2018, we sold 33,097 shares of our common stock at an average market price of $8.41 under the at-the-market offering program, resulting in aggregate gross proceeds of approximately $0.3 million.

October 2017 Direct Registered Offering

In October 2017, we entered into securities purchase agreements pursuant to which we sold an aggregate of 8,382,643 shares of common stock for total gross proceeds of $49.9 million, or the October 2017 Direct Registered Offering. We completed the closing of the October 2017 Direct Registered Offering on October 25, 2017. 

March 2018 Direct Registered Offering

In February 2018, we entered into a Securities Purchase Agreement pursuant to which we sold: (i) 4,090,000 shares of our common stock; (ii) 3,000,581 shares of our Series A convertible preferred stock; and (iii) warrants to purchase 1,418,116 shares of common

30


stock, or the 2018 Offering Warrants for total gross proceeds of $59.1 million, or the March 2018 Direct Registered Offering. We completed the closing of the March 2018 Direct Registered Offering on March 5, 2018. The 2018 Offering Warrants have an exercise price of $8.31 per share, became exercisable upon issuance and expire in March 2025.

August 2018 Public Offering of Common Stock

In August, 2018, pursuant to an underwriting agreement, we issued and sold an aggregate of 18,648,649 shares of our common stock at $9.25 per share to the public for total gross proceeds of $172.5 million.  

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2018 and December 31, 2017. Additionally, there were no material changes to our contractual obligations described in our Annual Report on Form 10-K filed with the SEC on March 12, 2018, except for the changes to operating lease obligations due to new and amended operating leases. See the section entitled “Notes to Condensed Consolidated Financial Statements – Note 6 – Commitments and Contingencies” in the condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

With the exception of the change in revenue recognition policy as a result of the adoption of ASC 606 (see the section entitled “Notes to Condensed Consolidated Financial Statements – Note 2 – Summary of Significant Accounting Policies” in the condensed consolidated financial statements), there have been no significant changes to our accounting policies during the nine months ended September 30, 2018, as compared to the critical accounting policies described in our Annual Report on Form 10-K filed with the SEC on March 12, 2018. We believe that the accounting policies discussed in that Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

JOBS Act Accounting Election

We are an “emerging growth company” within the meaning of the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

Recently Issued and Adopted Accounting Pronouncements

We review new accounting standards to determine the expected financial impact, if any, that the adoption of each new standard will have. For the recently issued and adopted accounting standards that we believe may have an impact on our condensed consolidated financial statements, see the section entitled “Notes to Condensed Consolidated Financial Statements – Note 2 – Summary of Significant Accounting Policies” in the condensed consolidated financial statements.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer, or CEO, and chief financial officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO have concluded that as of September 30, 2018, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports

31


that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such required information is accumulated and communic ated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the third quarter of 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

32


PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved and, on our business generally.  In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention and may materially adversely affect our reputation, even if resolved in our favor.  

The information under the caption “Commitments and Contingencies” in Note 6 of the unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2017. If any of the risks discussed in our Annual Report on Form 10-K or any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. The risks described in our Annual Report on Form 10-K and the risks described below are not the only risks facing the Company.

Risks Related to Administrative, Organizational and Commercial Operations and Growth

The loss of or our inability to attract and retain key personnel, including highly skilled executives, scientists and salespeople, could negatively impact our business.

The loss or incapacity of existing members of our executive management team could negatively impact our operations if we experience difficulties in hiring qualified successors. Our executive officers have employment agreements; however, the existence of an employment agreement does not guarantee the retention of the executive officer for any period of time .

Our commercial, manufacturing and research and development programs and operations depend on our ability to attract and retain highly skilled engineers, scientists and salespeople. We may not be able to attract or retain qualified personnel in the future due to the competition for qualified personnel among medical device businesses, including in California and Ohio. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. Recruiting and retention difficulties can limit our ability to support our commercial, manufacturing and research and development programs. All of our employees are at-will, which means that either we or the employee may terminate his or her employment at any time .

We have a limited history of manufacturing, assembling and installing MRIdian in commercial quantities and may encounter related problems or delays that could result in lost revenue. 

The pre-installation manufacturing processes for MRIdian include sourcing components from various third-party suppliers, subassembly, assembly, system integration and testing. We must manufacture and assemble MRIdian in compliance with regulatory requirements and at an acceptable cost in order to achieve and maintain profitability. We have only a limited history of manufacturing, assembling and installing MRIdian and, as a result, we may have difficulty manufacturing, assembling and installing MRIdian in sufficient quantities in a timely manner. To manage our manufacturing and operations with our suppliers, we forecast anticipated product orders and material requirements to predict our inventory needs up to a year in advance and enter into purchase orders on the basis of these requirements. Our limited manufacturing history may not provide us with sufficient data to accurately predict future component demand and to anticipate our costs effectively. Further, we have experienced and may in the future experience delays in obtaining components and materials from suppliers which could impede our ability to manufacture, assemble and install MRIdian on our expected timeline, which could result in order cancellations or contractual penalties. For example, in August 2018, in response to a worldwide shortage of liquid helium, our liquid helium supplier imposed on all its customers, including our company, a reduction in helium allocation amounts. The reduction in allocation is for the remainder of 2018 and may extend into 2019. We are actively working with other vendors and suppliers to supplement our liquid helium supplies.

Likewise, we have experienced and may in the future experience delays in the assembly and installation of MRIdian on our expected timeline and installing our systems at customer sites associated with contractor timing delays, which could result in order cancellations or contractual penalties. For example, one of our end customers has informed us that they believe we are late on delivery of one system and that we will be subject to penalties as a result. While we have disputed that claim, there can be no assurance that we will be successful, and penalties could adversely affect our results of operations. In another instance, one of our end customers experienced flooding at its site on two occasions, which has delayed our ability to complete installation and which may adversely affect our results of operations.

33


Alternatively, delays or postponements of scheduled customer installations could lead to excess inventory due to our limited flexibility to postpone or delay component shipments from suppliers. Accordingly, we may encounte r difficulties in production of MRIdian, including problems with quality control and assurance, component supply shortages or surpluses, increased costs, shortages of qualified personnel and difficulties associated with compliance with local, state, federa l and foreign regulatory requirements. In addition, if we are unable to maintain larger-scale manufacturing capabilities, our ability to generate revenue will also be limited and our reputation could be harmed. If we cannot achieve the required level and q uality of production, we may need to make changes in our supply chain or enter into licensing and other arrangements with third parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we outsource necessary production or enter into licensing or other third-party arrangements, the associated cost could reduce our gross margin and harm our financial condition and results of operations.

We face risks associated with our international business.

In addition to our marketing and sales of MRIdian in the United States, we also market MRIdian in other regions, with contracts signed with customers and distributors in those regions. Our international business operations are subject to a variety of risks, including :

 

difficulties in staffing and managing foreign and geographically dispersed operations ;

 

effective compliance with various U.S. and international laws, including export control laws and the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and anti-money laundering laws ;

 

effective compliance with privacy, data protection and information security laws, such as the European Union General Data Protection Regulation (GDPR) and the Cybersecurity Law of the People’s Republic of China;

 

differing regulatory requirements for obtaining clearances or approvals to market MRIdian and future product enhancements for MRIdian ;

 

changes in uncertainties relating to foreign rules and regulations that may impact our ability to sell MRIdian, perform services or repatriate profits to the United States ;

 

tariffs, export or import restrictions, restrictions on remittances abroad, imposition of duties or taxes that limit our ability to move MRIdian out of these countries or interfere with the import of essential materials into these countries ;

 

limitations on our ability to enter into cost-effective arrangements with distributors of MRIdian, or at all ;

 

fluctuations in foreign currency exchange rates ;

 

imposition of limitations on production, sale or export of MRI-guided radiation therapy systems in foreign countries ;

 

imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures ;

 

differing multiple payor reimbursement regimes, government payors or patient self-pay systems ;

 

imposition of differing labor laws and standards ;

 

economic, political or social instability in foreign countries and regions ;

 

dependence on, and potential disruptions to, our international supply chain, including as a result of changes in foreign laws and regulations, tariffs, export or import restrictions, political, economic and social instability or otherwise;

 

an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; and

 

availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us .

We expect that we will begin expanding into more markets; however, we cannot assure you that our expansion plans will be realized, or if realized, be successful. We expect each market to have particular regulatory and funding hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed . In addition, the U.S. government has recently imposed tariffs on certain U.S. imports, and the European Union, China and other countries have responded with retaliatory tariffs on certain U.S. exports. We cannot predict what effects these and potential additional tariffs will have on our business, including in the context of escalating trade tensions. However, such tariffs and other trade restrictions could increase our cost of doing business, reduce our gross margins or otherwise harm our business, financial condition or results of operations.

34


Int ernational tariffs, including tariffs applied to our MRIdian systems sold into China, could materially and adversely affect our business operations and financial condition.

Our global business could be negatively affected by trade barriers and other governmental protectionist measures, any of which can be imposed suddenly and unpredictably.  For example, in June 2018, the U.S. Government announced 25% tariffs on radiation therapy equipment imported from China, and in August 2018, China retaliated by announcing 25% tariffs on medical or surgical x-ray equipment, which may include MRIdian systems. The imposition of tariffs on MRIdian systems imported into China or elsewhere could require us to raise prices, which may negatively impact the demand for our products in the affected market and/or reduce our gross margins. In addition, any of our competitors that are based outside the United States or that are otherwise not subject to tariffs that affect us might gain a competitive advantage as a result. Given the uncertainty regarding the scope and duration of trade actions by the U.S., China and other countries, the impact of these trade actions or any other trade barriers, tariffs or similar measures on our business operations or financial condition remains uncertain.

Risks Related to Regulatory Matters

Modifications to MRIdian and our future products may require new 510(k) clearances or PMA approvals, or may require us to cease marketing or recall the modified products until clearances are obtained.

In the United States, we have obtained 510(k) premarket clearance from the FDA to market MRIdian for the provision of stereotactic radiosurgery and precision radiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment is indicated. Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA.

In February 2017, we received a 510(k) premarket clearance from the FDA to market the MRIdian system that contains MRIdian Linac. As we make other changes or enhancements to our MRIdian system, we will need to determine whether additional FDA clearance is required or not. However, the FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have made modifications to MRIdian in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or PMA approvals were not required. We may make similar modifications or add additional features in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMA applications for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

Furthermore, the FDA’s ongoing review of the 510(k) clearance process may make it more difficult for us to make modifications to our previously cleared products, either by imposing more strict requirements on when a new 510(k) notification for a modification to a previously cleared product must be submitted, or applying more onerous review criteria to such submissions. More recently, the FDA issued guidance “Deciding When to Submit a 510(k) for a Change to an Existing Device” and “Deciding When to Submit a 510(k) for a Software Change to an Existing Device”) on October 25, 2017 (replacement of a 1997 guidance document) to assist industry in determining when a change to a previously 510(k)-cleared product requires a new premarket notification to be submitted to the FDA. In addition, FDA issued guidance “Postmarket Management of Cybersecurity in Medical Devices” on December 28, 2016.  These new guidance documents could impose additional regulatory requirements upon us that could: increase the costs of compliance; restrict our ability to maintain our current clearances; and delay our ability to obtain 510(k) clearances . We cannot guarantee whether the FDA’s approach in future guidance will result in substantive changes to existing policy and practice regarding the assessment of whether a new 510(k) is required for changes or modifications to existing devices. The FDA continues to review its 510(k) clearance process, which could result in additional changes to regulatory requirements or guidance documents, which could increase the costs of compliance or restrict our ability to maintain current clearances .

Our MRIdian systems may cause or contribute to adverse medical events that we are required to report to regulatory bodies outside of the U.S. and to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our MRIdian systems, or a recall of our MRIdian systems either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.

We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that MRIdian may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of MRIdian. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of MRIdian or delay in clearance of future products .

35


The FDA and foreign regulatory bodies have the authority to require the recall of commercializ ed products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasona ble probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects, repeated misuse or other deficiencies or failures to comply with applicable regulations. We cannot assure you that similar or more signific ant product defects or other errors will not occur in the future. Recalls involving MRIdian could be particularly harmful to our business, financial condition and results of operations because it is currently our only product .

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA or other regulatory bodies. We may initiate voluntary withdrawals or corrections for MRIdian in the future that we determine do not require notification of the FDA or other regulators in the US and around the world. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales .

Legislative or regulatory reforms in the United States or the EU may make it more difficult and more costly for us to obtain regulatory clearances or approvals for MRIdian or to produce, market or distribute MRIdian after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices or the reimbursement thereof. In addition, the FDA or Nuclear Regulatory Commission, or NRC, regulations and guidance are often revised or reinterpreted by the FDA or NRC in ways that may significantly affect our business and our MRIdian systems In addition, as part of Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance or approval. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to manufacture, market or distribute MRIdian or future products. More recently, the FDA issued guidance (“Deciding When to Submit a 510(k) for a Change to an Existing Device” and “Deciding When to Submit a 510(k) for a Software Change to an Existing Device”) on October 25, 2017 to assist industry in determining when a change to a previously 510(k)-cleared product requires a new premarket notification to be submitted to the FDA. These new guidance documents could impose additional regulatory requirements upon us that could: increase the costs of compliance; restrict our ability to maintain our current clearances; and delay our ability to obtain 510(k) clearances. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require :

 

additional testing prior to obtaining clearance or approval;

 

changes to manufacturing methods;

 

recall, replacement or discontinuance of MRIdian or future products; or

 

additional record keeping.

Any of these changes could require substantial time and cost and could harm our business and our financial results.

On April 5, 2017, the European Parliament passed the Medical Devices Regulation, which repealed and replaced the Medical Devices Directive. The Medical Devices Regulation, among other things, is intended to establish a uniform, transparent, predictable and sustainable regulatory framework across the EEA for medical devices and ensure a high level of safety and health while supporting innovation.

The Medical Devices Regulation will become applicable three years after publication. Once applicable, the new regulations will among other things:

36


 

strengthen the rules on placing devices on the market and reinforce surveillance once they are available;

 

establish explicit provisions on manufacturers' responsibilities for the follow-up of the quality, performance and safety of devices placed on the market;

 

improve the traceability of medical devices throughout the supply chain to the end-user or patient through a unique identification number;

 

set up a central database to provide patients, healthcare professionals and the public with comprehensive information on products available in the EU;

 

strengthened rules for the assessment of certain high-risk devices, which may have to undergo an additional check by experts before they are placed on the market.

These modifications may have an impact on the way we conduct our business in the EEA.

Risks Related to Information Security and Cybersecurity

An information security incident, including a cybersecurity breach, could have a negative impact to the Company’s business or reputation.

To meet business objectives, we rely on both internal information technology (IT) systems and networks, and those of third parties and their vendors, to process and store sensitive data, including confidential research, business plans, financial information, intellectual property, and personal data that may be subject to legal protection. The extensive information security and cybersecurity threats, which affect companies globally, pose a risk to the security and availability of these IT systems and networks, and the confidentiality, integrity, and availability of our sensitive data. We assess these threats and makes investments to increase internal protection, detection, and response capabilities, as well as ensure that our third party providers have required capabilities and controls, to address this risk. To date, we have not experienced any material impact to the business or operations resulting from information or cybersecurity attacks; however, because of the frequently changing attack techniques, along with the increased volume and sophistication of the attacks, there is the potential that we could be adversely impacted. This impact could result in reputational, competitive, operational or other business harm as well as financial costs and regulatory action.

*    *    *

The risks above do not necessarily comprise all of those associated with an investment in the Company. This Quarterly Report contains forward-looking statements that involve unknown risks, uncertainties and other factors that may cause the actual results, financial condition, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Factors that might cause such a difference include, but are not limited to, those set out above.

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

 

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

37


Item 6. E xhibits.

 

 

Exhibit

 

 

 

Incorporated by Reference

 

Filed

Number

 

Description

 

Form

 

Exhibit

 

Date Filed

 

Herewith

 

 

 

 

 

 

 

 

 

 

 

2.1

 

Agreement and Plan of Merger and Reorganization, dated as of July 23, 2015, by and among ViewRay Inc., Acquisition Sub and ViewRay Technologies, Inc.

 

S-1/A

 

2.1

 

12/16/15

 

 

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation.

 

S-1/A

 

3.1

 

12/16/15

 

 

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of ViewRay, Inc.

 

8-K

 

3.2

 

5/10/18

 

 

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Certificate of Elimination of the Series A Convertible Preferred Stock of ViewRay, Inc .

 

8-K

 

3.1

 

5/10/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1

 

Vanni Business Park Industrial Lease by and between Vanni Business Park, LLC and ViewRay, Inc. dated April 11, 2018.

 

10-Q

 

10.1

 

8/7/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.2

 

Second Amendment to Office Lease by and between BXP Research Park LP and ViewRay, Inc. dated September 1, 2018.

 

10-Q

 

10.2

 

8/7/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.3

 

Separation Agreement, dated July 22, 2018, by and between ViewRay Inc. and Chris A. Raanes

 

10-Q

 

10.3

 

8/7/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.4

 

Separation Agreement, dated July 22, 2018, by and between ViewRay Inc. and Doug Keare

 

10-Q

 

10.4

 

8/7/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.5

 

Employment Agreement, dated July 22, 2018, by and between ViewRay Inc. and Scott Drake

 

10-Q

 

10.5

 

8/7/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.6

 

Employment Agreement, dated July 22, 2018, by and between ViewRay Inc. and Shahriar Matin

 

10-Q

 

10.6

 

8/7/18

 

 

 

 

 

 

 

 

 

 

 

 

 

10.7

 

ViewRay, Inc. 2018 Equity Inducement Award Program

 

S-8

 

99.1

 

8/10/18

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certification of Principal Executive Officer Required under Securities Exchange Act Rule 13a-14(a) and 15d-14(a).

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a) and 15d-14(a).

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

32.1

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 and Securities Exchange Act Rule 13a-14(b).

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101

 

Interactive Data Files of Financial Statements and Notes.

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

Instant Document

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Schema Document

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Definition Linkbase Document

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

 

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

 

 

 

 

 

 

X

 

 

38


SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

VIEWRAY, INC.

 

 

 

 

Dated: November 9, 2018

By:

  

/s/ Scott Drake

 

Name:

 

Scott Drake

 

Title:

 

Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

Dated: November 9, 2018

By:

  

/s/ Ajay Bansal

 

Name:

 

Ajay Bansal

 

Title:

 

Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

39

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