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ARAY > SEC Filings for ARAY > Form 10-Q on 7-Feb-2014All Recent SEC Filings

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Form 10-Q for ACCURAY INC


7-Feb-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition as of December 31, 2013 and results of operations for the three and six months ended December 31, 2013 and 2012 should be read together with our condensed consolidated financial statements and related notes included elsewhere in this report. Statements made in this Form 10-Q report that are not statements of historical fact are forward-looking statements and are subject to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report relate, but are not limited, to:
expectations related to profitability and cash flows in fiscal 2014; sufficiency of cash resources and expected cash flows to fund future operations; expected uses of cash during fiscal 2014; the anticipated drivers of our future capital requirements; the anticipated successful modification of the MLC for the CyberKnife Systems, the timing of its release and its impact on our business; the impact of our prior sales reorganization on sales performance, particularly in the United States; the expected impact of and benefits from our restructuring of operations; anticipated increases in service revenue; our expectations regarding the factors that will impact sales, competitive positioning and long-term success for our CyberKnife and TomoTherapy Systems; our expectations regarding the impact on our revenues and business of the introduction of our new CyberKnife and TomoTherapy Systems; the anticipated risks associated with our foreign operations and fluctuations in the U.S. dollar; and the impact of recent legislation and regulation on our business. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from expectations, including risks detailed from time to time under the heading "Risk Factors" in Part II, Item 1A of this report, in Part I, Item 1A of the Company's report on Form 10-K for fiscal year 2013 and in Part II, Item 1A of the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2013. Forward-looking statements speak only as of the date the statements are made and are based on information available to the Company at the time those statements are made and/or management's good faith belief as of that time with respect to future events. The Company assumes no obligation to update forward-looking statements to reflect actual performance or results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. Accordingly, investors should not place undue reliance on any forward-looking statements.

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

Overview

Products and Markets

Accuray is a radiation oncology company that develops, manufactures and sells precise, innovative treatment solutions. Our leading edge technologies are designed specifically to deliver radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy that is tailored to the specific needs of each patient. Our suite of products includes the CyberKnife® Systems and the TomoTherapy® Systems. The systems are generally complementary offerings, serving generally separate patient populations treated by the same medical specialty.

The CyberKnife Systems are robotic systems designed to deliver radiosurgery treatments to cancer tumors anywhere in the body. The CyberKnife Systems are the only dedicated, full body robotic radiosurgery systems on the market. Radiosurgery is an alternative to traditional surgery for tumors and is performed on an outpatient basis in one to five treatment sessions. It allows for the treatment of patients who otherwise would not be treated with radiation, who may not be good candidates for surgery, or who desire non-surgical treatments. The use of radiosurgery with CyberKnife Systems to treat tumors throughout the body has grown significantly in recent years, but currently represents only a small portion of the patients who develop tumors treatable with CyberKnife Systems. A determination of when it may or may not be appropriate to use a CyberKnife System for treatment is at the discretion of the treating physician and depends on the specific patient. However, given the CyberKnife Systems' design to treat focal tumors, the CyberKnife Systems are generally not used to treat (1) very large tumors, which are considerably wider than the radiation beam that can be delivered by CyberKnife Systems, (2) diffuse wide-spread disease, as is often the case for late stage cancers, because they are not localized (though CyberKnife Systems might be used to treat a focal area of the disease) and (3) systemic disease, like leukemias and lymphomas, which are not localized to an organ, but rather involve cells throughout the body.

In October 2012, we introduced our new CyberKnife M6 Series Systems that have the option of: fixed collimator, iris collimator, and/or multi-leaf collimator, or MLC. The initial supplier producing the MLC for our CyberKnife M6 Series Systems has experienced low manufacturing yields and has been able to deliver only a small number of units. Our life-cycle testing revealed that the initial units did not have the durability that we, and our customers, expect in our products. Currently we expect a limited release of the MLC for the CyberKnife Systems in June of 2014. Our expectation is that the device will have original design specifications, but will be produced with modifications to our supply chain and quality control processes to ensure improved yield and durability. While we are confident in our path forward, due to the complexity of the MLC, there is still some risk in this project that could cause further delays. In the meantime, and despite the delay in the launch of the MLC upgrade, we are continuing to book orders and install the CyberKnife M6 Series Systems with fixed and iris collimators.


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

† Adoption of our recently introduced new CyberKnife M6 Series Systems;

† Production and shipment of our MLC that meets the standards that we, and our customers, expect in our products;

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

† Greater awareness among doctors and patients of the benefits of radiosurgery with the CyberKnife Systems;

† Continued evolution in clinical studies demonstrating the safety, efficacy and other benefits of using the CyberKnife Systems to treat tumors in various parts of the body;

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

† Improved access to radiosurgery with the CyberKnife Systems in various countries through regulatory approvals;

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

† Expansion of sales of CyberKnife Systems in countries throughout the world.

The TomoTherapy Systems are advanced, fully integrated and versatile radiation therapy systems for the treatment of a wide range of cancer types. We began selling TomoTherapy Systems after our acquisition of TomoTherapy Incorporated on June 10, 2011. In October 2012, we introduced our new TomoTherapy H Series Systems that come in configurations of TomoHTM, TomoHDTM and TomoHDATM. Radiation therapy is used in a variety of ways, often to treat tissue surrounding a tumor area after surgical removal of the tumor and also as the primary treatment for tumors. Radiation therapy treatments impact both cancer cells as well as healthy tissue; therefore the total prescribed radiation dose is divided into many fractions and delivered in an average of 25 to 35 treatment sessions over several weeks. Radiation therapy has been widely available and used in developed countries for decades, though many developing countries do not currently have a sufficient number of radiation therapy systems to adequately treat their domestic cancer patient populations. The number of radiation therapy systems in use and sold each year is currently many times larger than the number of radiosurgery systems. We believe the TomoTherapy Systems offer clinicians and patients significant benefits over other radiation therapy systems in the market. We believe our ability to capture more sales in this established market will be influenced by a number of factors including the following:

† Adoption of our recently introduced new TomoTherapy H Series Systems;

† Greater awareness among doctors and patients of the benefits of radiation therapy using TomoTherapy Systems;

† Advances in technology which improve the quality of treatments and ease of use of TomoTherapy Systems;

† Greater awareness among doctors of the improvement in reliability of TomoTherapy Systems; and

† Expansion of TomoTherapy System sales in countries throughout the world.

Sale of Our Products

Generating revenue from the sale of our systems is a lengthy process. Selling our systems, from first contact with a potential customer to a signed sales contract that meets backlog criteria, generally spans six months to two years. The time from receipt of a signed contract to revenue recognition is governed generally by the time required by the customer to build, renovate or prepare the treatment room for installation of the system. This time varies significantly, generally from six months to two years.

In the United States, we market to customers, including hospitals and stand-alone treatment facilities, directly through our sales organization. Outside the United States, we market to customers directly and through distributors. We have sales and service offices in many countries in Europe, Japan and other countries in Asia.

Backlog

We report backlog in the following manner:

† Products: Orders for systems and upgrades excluding those acquired through the upgrade rights included in our Diamond service contracts are reported in backlog, excluding amounts attributable to PCS (warranty period services and post warranty services), installation, training and professional services.


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† Service: Orders for PCS, upgrades acquired through the upgrade rights included in our Diamond service contracts, installation services, training and professional services are not reported in backlog.

For orders that cover both products and services, only the portion of the order that will be recognized as product revenue is reported as backlog. The portion of the order that will be recognized as service revenue (for example, PCS) is not included in reported backlog. Product backlog totaled $362.0 million as of December 31, 2013. This included $32.2 million of orders for either new CyberKnife M6 Systems configured with an MLC or orders for MLC units to upgrade existing installed CyberKnife M6 Systems. Additionally, for $30.0 million of CyberKnife orders, the customer has the option to upgrade to the new platform (M6) if the CyberKnife M6 Series is approved by regulatory authorities in its country prior to shipment. Product backlog totaled $279.0 million as of December 31, 2012.

In order for the product portion of a sales agreement to be counted as backlog, it must meet the following criteria:

† The contract is signed and properly executed by both the customer and us. A customer purchase order that is signed and incorporates the terms of our contract quote will be considered equivalent to a signed and executed contract;

† The contract is non-contingent-it either has cleared all its contingencies or contains no contingencies when signed;

† We have received a minimum deposit or a letter of credit; the sale is a direct channel sale to a government entity, or the product has shipped to a customer with credit sufficient to cover the minimum deposit;

† The specific end customer site has been identified by the customer in the written contract or written amendment; and

† Less than 2.5 years have passed since the contract met all the criteria above.

Although our backlog includes only contractual agreements from our customers to purchase CyberKnife Systems or TomoTherapy Systems, we cannot provide assurance that we will convert backlog into recognized revenue due to factors outside our control, which include, without limitation, changes in customers' needs or financial condition, changes in government or health insurance reimbursement policies, changes to regulatory requirements, or other reasons for cancellation of orders.


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Results of Operations - Three and Six Months Ended December 31, 2013 and 2012



                                   Three Months Ended December 31,                           Six Months Ended December 31,
                               2013                 2012            2013-2012           2013                  2012          2013-2012
(Dollars in thousands)    Amount    % (a)      Amount     % (a)     % change       Amount     % (a)      Amount     % (a)   % change
Product                  $ 45,148      48 %   $  33,170      43 %          36 %   $  74,716      44 %   $  73,798      46 %         1 %
Services                   48,486      52        44,609      57             9        95,559      56        86,729      54          10
Net revenue              $ 93,634     100 %   $  77,779     100 %          20     $ 170,275     100 %   $ 160,527     100 %         6 %
Gross profit             $ 38,171      41 %   $  26,626      34 %          43 %   $  64,649      38 %   $  50,302      31 %        29 %
Product gross profit       20,168      45        14,606      44            38        31,135      42        31,225      42          (0 )
Services gross profit      18,003      37        12,020      27            50        33,514      35        19,077      22          76
Research and
development expenses       13,435      14        17,239      22           (22 )      26,385      15        35,813      22         (26 )
Selling and marketing
expenses                   14,262      15        15,761      20           (10 )      28,716      17        28,650      18           0
General and
administrative
expenses                   11,190      12        15,892      20           (30 )      22,550      13        28,734      18         (22 )
Other expense, net          3,775       4         2,580       3            46         6,235       4         3,284       2          90
Provision for income
taxes                         950       1           667       1            42         1,737       1         1,264       1          37
Loss from discontinued
operations
attributable to
stockholders                    -       -         3,658       5          (100 )           -       -         5,858       4        (100 )
Net loss attributable
to stockholders          $ (5,441 )     6 %   $ (29,171 )    38 %         (81 )%  $ (20,974 )    12 %   $ (53,301 )    33 %       (61 )%



(a) Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.

Net Revenue

International sales of our products account for a significant portion of our total net revenue. Revenue derived from sales outside of the United States was $58.9 million and $42.7 million for the three months ended December 31, 2013 and 2012, respectively, and represented 63% and 55% of our net sales during these periods, respectively. Revenue derived from sales outside of the United States was $96.3 million and $89.6 million for the six months ended December 31, 2013 and 2012, respectively, and represented 57% and 56% of our net sales during these periods, respectively.

Product Net Revenue. Product net revenue increased by $12.0 million for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. Product net revenue increased $10.0 million primarily due to a higher number of units sold; however, units were sold at a lower average selling price due to product and channel mix. We recognized revenue on 18 units during the three months ended December 31, 2013 as compared to 11 units during the three months ended December 31, 2012. Additionally, product upgrade revenue increased by $2.1 million during the three months ended December 31, 2013 as compared to the three months ended December 31, 2012.

Product net revenue increased by $1.0 million for the six months ended December 31, 2013 as compared to the six months ended December 31, 2012. The increase in product net revenue was primarily due to a higher number of units sold offset by product mix. We recognized revenue on 31 units during the six months ended December 31, 2013 as compared to 27 units during the six months ended December 31, 2012.

Services Net Revenue. Services net revenue increased by $3.9 million for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012. Services revenue was higher primarily due to an increase in our installed base and customer conversion to higher priced maintenance contracts (particularly the TomoTherapy Systems).

Services net revenue increased by $8.8 million for the six months ended December 31, 2013 compared to the six months ended December 31, 2012. The increase in services net revenue of $7.9 million was attributable to an increase in our installed base and customer conversion to higher priced maintenance contracts (particularly the TomoTherapy Systems). The remaining increase of $0.9 million was primarily due to an increase in installation and training revenue due to more units installed.

Gross Profit

The overall gross profit margin for the three months ended December 31, 2013 increased by 7 percentage points as compared to the three months ended December 31, 2012. Product gross margin for the three months ended December 31, 2013 remained relatively unchanged as compared to the three months ended December 31, 2012. Services gross margin for the three months period ended December 31, 2013 increased by 10 margin points primarily due to cost reductions associated with increased reliability of the TomoTherapy Systems and continued revenue growth due to installed base increase and contract mix.

The overall gross profit margin for the six months ended December 31, 2013 increased by 7 percentage points as compared to the six months ended December 31, 2012. Product gross margin for the six months ended December 31, 2013 remained relatively consistent as compared to the three months ended December 31, 2012; product gross margin was lower by 3 margin percentage points due to a change in


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product mix for the six months ended December 31, 2013, offset by the reduction in intangible asset amortization related to the acquisition of TomoTherapy on June 10, 2011. Services gross margin for the six months period ended December 31, 2013 increased by 13 margin points primarily due to cost reductions associated with the increased reliability of the TomoTherapy Systems and continued revenue growth due to the increase in installed base and contract mix.

Research and Development

Research and development expenses were $13.4 million in the three months ended December 31, 2013 as compared to $17.2 million in the three months ended December 31, 2012, which represents a decrease of $3.8 million, or 22%. The decrease is primarily due to the decrease in compensation and compensation-related expense, excluding bonus expense, of $4.1 million primarily resulting from the re-organization of the research and development function during the third quarter of fiscal 2013. Project related consulting costs decreased by $0.8 million due to the completion of various research and development projects. The decrease was offset by the increase in bonus expense of $1.8 million in the three months ended December 31, 2013.

Research and development expenses were $26.4 million in the six months ended December 31, 2013 as compared to $35.8 million in the six months ended December 31, 2012, which represents a decrease of $9.4 million, or 26%. The decrease is primarily due to the decrease in compensation and compensation-related expense, excluding bonus expense, of $8.3 million resulting from the re-organization of the research and development function during the third quarter of fiscal 2013. Project related consulting costs decreased by $1.9 million due to the completion of various research and development projects. The decrease was offset by the increase in bonus expense of $1.5 million in the six months ended December 31, 2013.

Selling and Marketing

Selling and marketing expenses for the three months ended December 31, 2013 were $14.3 million as compared to $15.8 million for the three months ended December 31, 2012, which represents a decrease of $1.5 million, or 10%. The expenses decreased by $4.0 million in the three months ended December 31, 2013 as compared to the three months ended December 31, 2012, due to lower tradeshow expenses primarily due to the introduction of two new products at an industry trade show in October 2012. The decrease was offset by $1.4 million higher commission expense due to higher sales, and a $0.9 million increase in bonus expense.

Selling and marketing expenses for the six months ended December 31, 2013 and 2012 were $28.7 million. Tradeshow and advertising expenses were lower by $2.8 million in the six months ended December 31, 2013 as compared to the six months ended December 31, 2012, due to the introduction of two new products at an industry trade show in October 2012. The decrease was offset by $1.4 million higher commission expense due to the increase in sales, as well as the increase in bonus expense of $0.7 million.

General and Administrative

General and administrative expenses for the three months ended December 31, 2013 were $11.2 million as compared to $15.9 million for the three months ended December 31, 2012, which represents a decrease of $4.7 million, or 30%. This decrease was partially attributable to $2.2 million of severance charges incurred for the departure of our former CEO, COO and other employees, and $1.7 million related to lease acceleration and fixed asset disposal charges from vacating an office facility during the three months ended December 31, 2012. Consulting, legal and accounting related expenses were reduced by $0.7 million in the three months ended December 31, 2013 as compared to the same period ended December 31, 2012, due to cost control initiatives.

General and administrative expense for the six months ended December 31, 2013 were $22.6 million as compared to $28.7 million for the six months ended December 31, 2012, which represents a decrease of $6.1 million, or 22%. This decrease was partially attributable to $2.2 million of severance charges incurred for the departure of our former CEO, COO, CFO and other employees, and $1.7 million related to lease acceleration and fixed asset disposal charges from vacating an office facility during the three months ended December 31, 2012. Consulting, legal and accounting related expenses were reduced by $1.5 million in the six months ended December 31, 2013 as compared to the same period ended December 31, 2012, due to cost control initiatives.

Other Expense, Net

Net other expense for the three months ended December 31, 2013 was $3.8 million as compared to $2.6 million for the three months ended December 31, 2012, which represents an increase of $1.2 million. Net other expense for the six months ended December 31, 2013 was $6.2 million as compared to $3.3 million for the six months ended December 31, 2012, which represents an increase of $2.9 million. The increase for both the three- and six-month periods was primarily due to interest expense related to the 3.50% Convertible Notes which were issued in February 2013. See Note 8, "Debt" to condensed consolidated financial statements.


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Provision for Incomes Taxes

On a quarterly basis, we provide for income taxes based upon an estimated annual effective income tax rate. Income tax expenses were $1.0 million and $1.7 million for the three and six months ended December 31, 2013 respectively, compared to income tax expenses of $0.7 million and $1.3 million for the three and six months ended December 31, 2012 respectively. The increases were primarily due to increased earnings in international locations.

Loss from Discontinued Operations

As a result of the deconsolidation of CPAC in the second quarter of fiscal 2013, the results of operations of CPAC and the losses attributable to the non-controlling interest recorded for the three and six month periods ended December 31, 2012 have been presented as discontinued operations.

Impairment of Indefinite Lived Intangible Assets

We incurred $12.2 million of impairment charges related to the write-down of our IPR&D asset during the three months ended September 30, 2012 based on results of research and development work carried out by CPAC, a variable interest entity consolidated by us until December 2012. See Note 3, "Goodwill and Intangible Assets" to the condensed consolidated financial statements for details.

Liquidity and Capital Resources

At December 31, 2013, we had $70.4 million in cash and cash equivalents and $89.2 million in short-term investments, for a total of $159.6 million. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks included in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A titled "Risk Factors" of our Form 10-K for the year ended June 30, 2013. Also refer to Note 8, "Debt" to the condensed consolidated financial statements for discussion of the Convertible Notes. Based on our current business plan and revenue prospects, we believe that we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months.

In addition, the undistributed earnings of our foreign subsidiaries at December 31, 2013 are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise. Accordingly, no provisions for U.S. income taxes have been provided thereon. We anticipate that we have adequate liquidity and capital resources and would not need to repatriate earnings. As of December 31, 2013, we had approximately $62.0 million of cash at our foreign subsidiaries.

Our cash flows for the six months ended December 31, 2013 and 2012 are summarized as follows (in thousands):

                                                          Six months ended December 31,
                                                             2013               2012
Net cash used in operating activities                   $       (12,910 )  $       (41,811 )
Net cash provided by (used in) investing activities               4,413            (13,300 )
Net cash provided by financing activities                         3,864              5,147
. . .
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