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

Show all filings for ACCURAY INC

Form 10-Q for ACCURAY INC


7-May-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 March 31, 2014 and results of operations for the three and nine months ended March 31, 2014 and 2013 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 annual report on Form 10-K for fiscal year 2013 and in Part II, Item 1A of the Company's quarterly reports on Form 10-Q for the quarters ended September 30, 2013 and December 31, 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 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 could generally span 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, while we primarily market to customers, including hospitals and stand-alone treatment facilities, directly through our sales organization, we also market to customers through a distributor and group purchasing organizations. 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, South America, and other countries throughout the world.

Backlog

We report backlog in the following manner:

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

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


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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 $353.6 million as of March 31, 2014. This included $37.1 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 $37.5 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 $297.9 million as of March 31, 2013.

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 Nine Months Ended March 31, 2014 and 2013



                                    Three Months Ended March 31,                             Nine Months Ended March 31,
                               2014                 2013           2014-2013           2014                  2013          2014-2013
(Dollars in thousands)    Amount    % (a)      Amount     % (a)    % change       Amount     % (a)      Amount     % (a)   % change
Products                 $ 47,045      48 %   $  25,023      35 %         88 %   $ 121,761      46 %   $  98,821      43 %        23 %
Services                   50,099      52        45,524      65           10       145,658      54       132,253      57          10
Net revenue              $ 97,144     100 %   $  70,547     100 %         38 %   $ 267,419     100 %   $ 231,074     100 %        16 %
Gross profit             $ 39,704      41 %   $  20,053      28 %         98 %   $ 104,353      39 %   $  70,355      30 %        48 %
Products gross profit      21,790      46         6,620      26          229        52,925      43        37,845      38          40
Services gross profit      17,914      36        13,433      30           33        51,428      35        32,510      25          58
Research and
development expenses       13,763      14        15,697      22          (12 )      40,148      15        51,510      22         (22 )
Selling and marketing
expenses                   15,310      16        12,646      18           21        44,026      16        41,296      18           7
General and
administrative
expenses                   11,106      11        16,745      24          (34 )      33,656      13        45,479      20         (26 )
Other expense, net          3,312       3         5,565       8          (40 )       9,547       4         8,849       4           8
Provision for income
taxes                         878       1           603       1           46         2,615       1         1,867       1          40
Loss from discontinued
operations
attributable to
stockholders                    -       -             -       -            -             -       -         5,858       3        (100 )
Net loss attributable
to stockholders          $ (4,665 )     5 %   $ (31,203 )    44 %        (85 )%  $ (25,639 )    10 %   $ (84,504 )    37 %       (70 )%



(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

Sales of our products outside of the Americas region account for a significant portion of our total net revenue. Revenue derived from sales outside of the Americas region was $64.9 million and $42.2 million for the three months ended March 31, 2014 and 2013, respectively, and represented 67% and 60% of our net sales during these periods, respectively. Revenue derived from sales outside of the Americas region was $161.2 million and $131.8 million for the nine months ended March 31, 2014 and 2013, respectively, and represented 60% and 57% of our net sales during these periods, respectively.

Product Net Revenue. Product net revenue increased by $22.0 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Product net revenue increased $19.0 million primarily due to a higher number of units sold, although the units also were sold at a higher average selling price due to product configuration mix. We recognized revenue on 15 units initially sold during the three months ended March 31, 2014 as compared to 9 units during the three months ended March 31, 2013. Additionally, in the three months ended March 31, 2014, product net revenue increased by $3.0 million due to increased revenue from cash basis collections and increased upgrade revenue.

Product net revenue increased by $22.9 million for the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013. The increase in product net revenue was primarily due to a higher number of units sold offset by product mix. We recognized revenue on 46 units during the nine months ended March 31, 2014 as compared to 36 units during the nine months ended March 31, 2013.

Services Net Revenue. Services net revenue increased by $4.6 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase in services net revenue of $2.6 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 $2.0 million was primarily due to an increase in installation and training revenue due to more units installed.

Services net revenue increased by $13.4 million for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013. The increase in services net revenue of $10.4 million was attributable to an increase in our installed base and customer conversion to higher priced maintenance contracts (particularly the TomoTherapy Systems). The increase of $2.8 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 March 31, 2014 increased by 13 percentage points as compared to the three months ended March 31, 2013. Product gross margin for the three months ended March 31, 2014 increased by 20 margin points primarily due to reduction of fixed costs per unit sold due to the increase in sales. Services gross margin for the three months ended March 31, 2014 increased by 6 margin points primarily due to cost reductions associated with increased reliability of the TomoTherapy Systems and continued revenue growth due to installed base increases and contract mix.

The overall gross profit margin for the nine months ended March 31, 2014 increased by 9 percentage points as compared to the nine months ended March 31, 2013. Product gross margin for the nine months ended March 31, 2014 increased by 5 margin points as compared to the nine months ended March 31, 2013; product gross margin was higher by 3 margin percentage points due to increased revenues reducing fixed costs per unit, and higher by 2 margin percentage points due to the reduction in intangible asset amortization related to the acquisition of TomoTherapy on June 10, 2011. Services gross margin for the nine months period ended March 31, 2014 increased by 10 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.


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Research and Development

Research and development expenses were $13.8 million in the three months ended March 31, 2014 as compared to $15.7 million in the three months ended March 31, 2013, which represents a decrease of $1.9 million, or 12%. The decrease was primarily due to lower compensation and compensation-related expense of $1.8 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 $1.5 million due to the completion of various research and development projects. The decrease was offset by higher bonus expense of $0.9 million and higher share-based compensation expense of $0.3 million.

Research and development expenses were $40.1 million in the nine months ended March 31, 2014 as compared to $51.5 million in the nine months ended March 31, 2013, which represents a decrease of $11.4 million, or 22%. The decrease was primarily due to lower compensation expense of $10.2 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 $3.5 million due to the completion of various research and development projects. The decrease was offset by the higher bonus expense of $2.2 million and higher share-based compensation expense of $0.5 million.

Selling and Marketing

Selling and marketing expenses for the three months ended March 31, 2014 were $15.3 million as compared to $12.6 million for the three months ended March 31, 2013, which represents an increase of $2.7 million, or 21%. The increase was primarily due to a $2.5 million increase in compensation and compensation related expenses; commission expense increased by $0.7 million due to higher sales, bonus expense increased by $0.6 million, share-based compensation expense increased by $0.3 million, and other compensation related expense of $0.9 million increased mainly due to the increase in headcount.

Selling and marketing expenses for the nine months ended March 31, 2014 were $44.0 million as compared to $41.3 million for the nine months ended March 31, 2013, which represents an increase of $2.7 million, or 7%. The increase was partially attributable to a $4.9 million increase in compensation and compensation related expenses, which consisted mainly of the increase in commission expense of $2.1 million due to higher sales, $1.4 million increase in bonus expense, and $0.7 million increase in share-based compensation expense mainly due to the increase in grants of equity awards and higher value per grant. The increase was offset by lower trade show expense of $2.5 million due to the introduction of two new products at an industry trade show in October 2012.

General and Administrative

General and administrative expenses for the three months ended March 31, 2014 were $11.1 million as compared to $16.7 million for the three months ended March 31, 2013, which represents a decrease of $5.6 million, or 34%. The decrease was partially attributable to $4.9 million of severance charges incurred during the three months ended March 31, 2013 due to the restructuring of operations announced in January 2013. In addition, other payroll and contractual labor expenses decreased by $0.8 million, consulting, legal and accounting related expenses decreased by $1.0 million due to cost control initiatives, and allowance for doubtful accounts decreased by $0.4 million due to the collection of doubtful accounts receivable during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The decrease was offset by higher bonus expense of $0.8 million and higher share-based compensation expense of $0.4 million during the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

General and administrative expenses for the nine months ended March 31, 2014 were $33.7 million as compared to $45.5 million for the nine months ended March 31, 2013, which represents a decrease of $11.8 million, or 26%. This decrease was partially attributable to $7.2 million of severance charges incurred during the three months ended December 31, 2012 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. In addition, payroll and contractual labor expenses decreased by $2.1 million and consulting, legal and accounting related expenses decreased by $2.5 million due to cost control initiatives during the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013. The decrease was offset by higher bonus expense of $1.6 million and higher share-based compensation expense of $0.4 million during the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013.


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Other Expense, Net

Net other expense for the three months ended March 31, 2014 was $3.3 million as compared to $5.6 million for the three months ended March 31, 2013, which represents a decrease of $2.3 million. During the three months ended March 31, 2014, we recognized $3.5 million of interest expense related to our 3.75% Convertible Notes and 3.50% Convertible Notes, partially offset by interest income of $0.1 million from our available-for-sale investments. During the three months ended March 31, 2013, we recognized net other expense of $5.6 million primarily due to $2.8 million of interest expense related to our 3.75% Convertible Notes and 3.50% Convertible Notes and $2.5 million of foreign currency losses primarily resulting from the depreciation of the Japanese Yen against the U.S. Dollar.

Net other expense for the nine months ended March 31, 2014 was $9.5 million as compared to $8.8 million for the nine months ended March 31, 2013, which represents an increase of $0.7 million. During the nine months ended March 31, 2014, we recognized $10.4 million of interest expense related to our 3.75% Convertible Notes and 3.50% Convertible Notes, partially offset by interest income of $0.4 million from our available-for-sale investments and $0.3 million gain from foreign currency exchange. During the nine months ended March 31, 2013, we recognized net other expense of $8.8 million primarily due to $7.0 million of interest expense related to our 3.75% Convertible Notes and 3.50% Convertible Notes and $2.2 million of foreign currency losses primarily resulting from the depreciation of the Japanese Yen against the U.S. Dollar, partially offset by a $0.7 million gain on our previously held equity interest in Morphormics, Inc., resulting from our acquisition of Morphormics on July 16, 2012.

Provision for Incomes Taxes

On a quarterly basis, the Company provides for income taxes based upon an estimated annual effective income tax rate. Income tax expense was $0.9 million and $2.6 million for the three and nine months ended March 31, 2014, respectively, compared to income tax expense of $0.6 million and $1.9 million for the three and nine months ended March 31, 2013, respectively. The increase in tax expense of $0.3 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 and the increase of $0.7 million for the nine months ended March 31, 2014 compared to the nine months ended March 31, 2013 were primarily related to an increase in corporate earnings of our foreign subsidiaries, net of release of tax reserves on several foreign entities due to a lapse of statute of limitations during the period.

Loss from Discontinued Operations

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