Accuray Annual Report 2014

Plain-text annual report

PRECISION MATTERS Like our products, our core business aims for the highest precision Accuray Incorporated 2014 Annual Report 1310 Chesapeake Terrace Sunnyvale, CA 94089 USA Tel: +1.408.716.4600 Toll Free: 1.888.522.3740 Fax: +1.408.716.4601 Email: investorrelations@accuray.com www.Accuray.com Precise, innovative tumor treatments™ Four consecutive quarters as the highest rated radiation oncology vendor MD Buyline is a market intelligence organization providing independent analysis and reporting to the healthcare industry. On a quarterly basis, MD Buyline measures user satisfaction based on evaluations by more than 3,300 hospitals in its member network. Respondents rank how satisﬁed they are with their radiation treatment delivery system using six key metrics. Results are reported quarterly through the MD Buyline Market Intelligence Brieﬁng™. SENIOR MANAGEMENT Joshua H. Levine President and Chief Executive Ofﬁcer Gregory E. Lichtwardt Composite Executive Vice President, Operations and Chief Financial Ofﬁcer Vice Chairperson of the Board Kelly J. Londy Joshua H. Levine Executive Vice President, Chief Commercial Ofﬁcer President, Chief Executive Ofﬁcer and Director 10 9.5 9 8.5 8 7.5 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Senior Vice President, General Counsel and Corporate Secretary MARKET AVERAGE ACCURAY The Q2 2014 briefing shows six consecutive quarters of positive increases in composite satisfaction rating for Accuray – resulting in a top rating in each of the last four quarters. © 2014 MD Buyline. All Rights Reserved. Marketing Intelligence Brieﬁng. Used with permission 6/25/14. Gross Orders $255M $263M $219M $240M Net Orders $172M $300 $250 $200 $150 $100 $50 $- $221M CORPORATE HEADQUARTERS FY'12 FY'13 FY'14 FY'12 FY'13 FY'14 $409M Revenue $316M $369M FY'12 FY'13 FY'14 $20 $10 $- $(10) $(20) $(30) $(40) $(50) $(60) Adj EBITDA $13M FY'12 FY'13 FY'14 ($21.3M) ($56M) Adjustment excludes equity based compensation expense See Appendix for complete reconciliation $300 $250 $200 $150 $100 $50 $- $450 $400 $350 $300 $250 $200 $150 $100 $50 $- BOARD OF DIRECTORS Louis J. Lavigne, Jr., Director Chairperson of the Board Elizabeth Dávila Jack Goldstein, Ph.D., Director Richard R. Pettingill, Director Emad Rizk, M.D., Director Robert S. Weiss, Director Dennis L. Winger, Director Theresa L. Dadone Senior Vice President, Human Resources Senior Vice President, Research and Development Senior Vice President and Chief Information Ofﬁcer Robert W. Hill Ole S. Mikkelsen Darl S. Moreland Alaleh Nouri Senior Vice President, Regulatory, Quality and Compliance STOCK MARKET INFORMATION INDEPENDENT REGISTERED PUBLIC As of June 30, 2014 there were 257 stockholders ACCOUNTING FIRM of record of the Company’s capital stock. The Grant Thornton San Francisco Company has not paid dividends on its capital stock. San Francisco, CA 94111 Accuray is traded on the NASDAQ market under symbol ARAY. INQUIRIES 1310 Chesapeake Terrace Sunnyvale, CA 94089 (408) 716-4600 (phone) (408) 716-4601 (fax) www.accuray.com www.cyberknife.com www.tomotherapy.com LEGAL COUNSEL Wilson Sonsini Goodrich & Rosati Palo Alto, CA 94304 TRANSFER AGENT Computershare 330 N Brand Blvd, Suite 701 Glendale, CA 91203-2389 Communications concerning stock transfer requirements, lost certiﬁcates and changes of address should be directed to the Transfer Agent. Inquiries regarding company ﬁnancial information should be directed to: ACCURAY, INC. Attn: Investor Relations 1310 Chesapeake Terrace Sunnyvale, CA 94089 E-mail: investorrelations@accuray.com ANNUAL REPORT AND FORM 10-K A copy of the Company’s 2014 Annual Report on Form 10-K is ﬁled with the Securities and Exchange Commission and is available, without charge, by calling or writing the Company at the address under Inquiries. A copy of the Company’s 2014 Annual Report is also available online at www.accuray.com. TRADEMARKS “Accuray,” “CyberKnife” and “TomoTherapy” are registered trademarks of the Company. TO OUR STOCKHOLDERS, 5FEB201322283582 Fiscal 2014 was a year of significant progress in achieving the objectives we established to expand our business. The continued commitment and focus of our 1000+ Accuray employees has enabled the organization to drive visible improvements in commercial momentum and overall financial performance. In terms of improved commercial execution, we’ve made substantial progress in driving market acceptance of the extensive benefits of our CyberKnife(cid:1) and TomoTherapy(cid:1) Systems. Fiscal 2014 marked the expansion of our worldwide installed base to over 700 systems, while treatment utilization has grown to half a million patient treatments. Additional fiscal 2014 installed base milestones included the installation of our 500th TomoTherapy System and the treatment of the 5000th patient since 2005 at the Munich CyberKnife Center. Over the last 12 months we have continued to drive commercial momentum through changes related to people, processes and strategies associated with a wide range of market facing functions and activities. During the year we installed new commercial leadership in our Americas region, aligned sales and service under our Chief Commercial Officer, implemented an improved customer relationship management system, and signed contracts with two group purchasing organizations (GPOs). All of this resulted in an increased demand for our CyberKnife and TomoTherapy systems, as measured by the 29% year-over-year growth in net orders, and validates the company’s focus on service, technology and commercial execution. We continued aligning resources with key customer loyalty drivers and increased investments focused on improving customer service and responsiveness, medical education and training, and supply chain and logistics, to drive improved perceptions in the overall customer experience with Accuray products and services. These improvements have resulted in our systems receiving the highest composite overall user satisfaction rating among radiation treatment delivery systems in the U.S. for four quarters in a row, according to the Q2 2014 MD Buyline Market Intelligence Briefing(cid:3). Overall reliability and system uptime are at all time highs, and we are confident that both of our technology platforms, and specifically the TomoTherapy System, are meeting or exceeding our customers’ expectations for reliability and performance. The TomoTherapy H(cid:3) Series is gaining a reputation as a mainstream solution that can treat BOTH complex and routine cancer cases. As a consequence, our TomoTherapy H Series is being seen as a substantially more viable treatment option in an increasing number of customer locations. During fiscal 2014, we received a number of regulatory approvals that increased market access for our products, the most notable being Shonin approval in Japan which allows us to market our CyberKnife M6(cid:3) system. Additionally in 2014 we continued to enhance the functionality and capability of our TomoTherapy installed base equipment fleet through the release of the VoLO(cid:3) treatment planning/TomoEDGE(cid:3) component upgrades. This upgrade program was extremely well received with more than 30% of our installed base customers purchasing the upgrade, making it the fastest selling upgrade program in the history of the company. Late in the year, we prepared for the installation of the first of multiple InCise(cid:3) Multi-Leaf Collimator (MLC) evaluation units into the field. We are hopeful that these units perform as well in the clinical setting as they have through internal testing which would support a broader market launch plan during fiscal 2015. Lastly, we have dramatically improved the financial health of Accuray in a very deliberate and determined way. For fiscal 2014, we grew total revenue and gross profit by 17% and 46% respectively and reduced operating expenses by 10%. The company’s adjusted EBITDA increased 124 percent or approximately 69 million dollars to 13.3 million dollars for the full fiscal year. Total cash used during the year was 2.5 million dollars as compared to 80 million dollars in the prior year when excluding the infusion from the fiscal 2013 convertible debt offering. This is a major change in the financial stability of the company and sets us on a very different course going forward. We achieved this while maintaining an investment in research and development that is twice that of our competitors, measured by percent of sales. LOOKING FORWARD The entire Accuray team is excited about the opportunities ahead of us. We have stabilized our business, improved our cash flow and have a clearly identified pathway to profitability. The improvements in our overall financial performance and the consistency in commercial execution skills will ensure that more patients and clinicians will have access to the superior precision associated with our innovative technologies for a long time to come. While we’re pleased with our progress in fiscal 2014, there is still more work to be done. The U.S. business continues to lag behind our international regions in the company’s overall turnaround and we have further investments to make in our installed base. Fiscal 2015 strategies are a deliberate continuation of those established more than 18 months ago, with emphasis on increasing U.S. market share, maximizing growth outside the U.S., enhancing service excellence and customer satisfaction, and optimizing our product portfolio to maintain our technology lead. Maintaining our commercial momentum and growing U.S. market share is a key focus for us in fiscal year 2015. Core initiatives will generate new leads and drive conversion of U.S. customers currently in the sales funnel. We are also placing an increased emphasis on developing relationships with the GPOs and translating those opportunities into system orders. We’re off to a solid start with the recent announcement of a multi-system purchase order from the Veterans Administration health system. We have also recently announced a three-year exclusive radiation therapy solutions contract with Premier, Inc., providing Accuray with access to more than 3,000 member hospitals for the CyberKnife(cid:1) M6(cid:3) and TomoTherapy(cid:1) HDA(cid:3) Systems. We expect that agreements with government customers, as well as with all of the GPOs with whom we are partnering, will improve our visibility to potential deals earlier in the sales cycle and will result in new opportunities for our products and services over time. We are leveraging the tangible commercial momentum that we have established to pursue additional growth opportunities in regional markets outside the U.S., including both developed and emerging markets in Europe, Asia Pacific, and Japan. Whether direct sales or distributor-based, this strategy is also a key driver in our ability to meet our financial objectives. While opportunities exist around the world, as a team we are remaining disciplined about how we prioritize our opportunities. From an emerging market perspective we believe China remains our largest prospect and is our number one focus, supported by a significant unmet need for access to radiation therapy based on the size of its population. 5FEB201322283582 Delivering outstanding service that drives customer satisfaction and loyalty will continue to be a focus for Accuray. While the MD Buyline data indicating significant improvement in the reliability and performance of our products is gratifying, there is still work to be done to reach the level where that experience becomes a sustainable competitive advantage. Reaching this goal will require a concerted effort and commitment across functional areas with initiatives focused on improving product and supplier quality, service technician training and parts availability, and a measurement plan that ensures continued improvement. Remaining relevant to clinicians and their patients requires ongoing innovation focused on enhancing quality of care. We plan to continue supporting programs that expand our product portfolio and allow us to leverage our unique positioning in the two fastest growing radiotherapy treatment applications, SBRT and image guided IMRT. We are pursuing a wide range of product development opportunities related to both new products as well as expanding the clinical applications and improving the functionality of our existing products. Successful execution and advancement of our product development pipeline will provide a combination of both incremental and game-changing benefits for our customers and their patients. While we are proud of our accomplishments in fiscal 2014 we will remain focused going forward to ensure we can fully exploit the opportunities we have before us and unlock the true value of our Company for all Accuray stakeholders. I want to personally thank the global family of Accuray employees for their efforts in fiscal 2014 as well as the significant support and guidance provided by the Accuray Board of Directors. Lastly, thank you, our shareholders for your continued support in fiscal 2014 and your confidence going forward. I speak for the entire Accuray team when I say we are fully committed to driving market innovative solutions that help cancer patients live longer, better lives. Sincerely, 2OCT201407161113 Josh Levine President and Chief Executive Officer October 10, 2014 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) (cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2014 (cid:2) or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-33301 ACCURAY INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE (State or Other Jurisdiction of Incorporation or organization) 20-8370041 (I.R.S. Employer Identification No.) 1310 Chesapeake Terrace Sunnyvale, California 94089 (Address of Principal Executive Offices) (Zip Code) Registrants’ telephone number, including area code: (408) 716-4600 Securities registered pursuant to section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $.001 par value per share The NASDAQ Stock Market LLC Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:2) No (cid:1) Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:2) No (cid:1) 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 (cid:1) No (cid:2) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:2) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer (cid:2) Accelerated filer (cid:1) Smaller reporting company (cid:2) Non-accelerated filer (cid:2) (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:2) No (cid:1) The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant based on the last sale price for such stock on December 31, 2013, the last business day of the registrant’s most recently completed second fiscal quarter was: $320,685,967. Shares of the registrant’s common stock held by each executive officer, director and 5% stockholder have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of August 15, 2014, the number of outstanding shares of the registrant’s common stock, $0.001 par value, was 77,300,200 Portions of the Proxy Statement for the Registrant’s 2014 Annual Meeting of stockholders are incorporated by reference in Part III of this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE ACCURAY INCORPORATED YEAR ENDED JUNE 30, 2014 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV 2 Page No. 3 28 54 54 55 55 56 57 60 76 77 120 120 120 122 122 122 122 122 123 133 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements regarding future revenues and expenses, marketing efforts, reimbursement rates, regulatory requirements, future orders, radiation therapy market, our strategy, our products, intellectual property rights, and our earnings or other financial results, and other statements using words such as ‘‘anticipates,’’ ‘‘believes,’’ ‘‘could,’’ ‘‘estimates,’’ ‘‘expects,’’ ‘‘forecasts,’’ ‘‘intends,’’ ‘‘may,’’ ‘‘plans,’’ ‘‘projects,’’ ‘‘should,’’ ‘‘will’’ and ‘‘would,’’ and words of similar import and the negatives thereof. Accuray Incorporated (‘‘we,’’ ‘‘our, or the ‘‘Company’’) has based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. These forward-looking statements speak only as of the date of this Form 10-K and are subject to business and economic risks. Factors that could cause our actual results to differ materially include those discussed under ‘‘Risk Factors’’ in Part I, Item 1A of this report. We undertake no obligation to update or revise any forward-looking statements to reflect any event or circumstance that arises after the date of this report. Item 1. BUSINESS The Company PART I Accuray Incorporated is a radiation oncology company that develops, manufactures, sells and supports precise, innovative treatment solutions. Our leading edge technologies are designed to deliver advanced radiation therapy, including radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy tailored to the specific needs of each patient. Our suite of products includes the CyberKnife(cid:3) Systems and the TomoTherapy(cid:3) Systems. The systems are complementary offerings, optimized to serve separate patient populations treated by the same medical specialty, with advanced capabilities that offer increased treatment flexibility. The CyberKnife Systems are fully robotic stereotactic radiosurgery systems, or SRS, and stereotactic body radiation therapy systems, or SBRT, used to treat multiple types of cancer and tumors throughout the body. The CyberKnife Systems automatically track, detect and correct for tumor and patient movement in real-time during the procedure, enabling delivery of precise, high dose radiation with sub-millimeter accuracy while patients breathe normally, without manual user intervention. Treatment with the CyberKnife Systems requires no anesthesia, and can be performed in one to five staged treatment sessions on an outpatient basis. In addition, the CyberKnife Systems are designed to minimize many of the risks and complications associated with other treatment options. The latest generation CyberKnife M6 Series System which includes fixed and iris collimators as well as an anticipated multi-leaf collimator, or MLC, has improved throughput, motion tracking and treatment flexibility over previous generation systems. The TomoTherapy Systems are used to treat a wide range of cancers and tumors, and enable efficient daily imaging to ensure the accuracy of the patient position before each treatment delivery. The TomoTherapy Systems operate on ring gantries and combine integrated computer tomography, or CT, imaging with intensity modulated radiation therapy, or IMRT, which is designed to deliver radiation treatments with speed and precision while reducing radiation exposure to surrounding healthy tissue. The latest generation TomoTherapy System is the Tomo H TM Series that includes the following options: TomoHelicalTM, TomoDirectTM, High Performance VoLo TM Planning and TomoEdge dynamic jaws. The system configuration depends on the options chosen by the customer. 3 We also factory refurbish and sell CyberKnife M6 Series Systems, CyberKnife VSI Systems, TomoTherapy HDA Series Systems and TomoTherapy Hi-Art Systems. We were incorporated in California in 1990 and commenced operations in 1992. We reincorporated in Delaware in 2007. Our principal offices are located at 1310 Chesapeake Terrace, Sunnyvale, CA 94089, and our telephone number is (408) 716-4600. Market Overview Despite significant improvements in cancer diagnosis and treatment, cancer rates continue to increase globally and are a leading cause of death. According to the International Agency for Research on Cancer, the specialized cancer agency of the World Health Organization, annual cancer rates around the world are projected to increase by over 56% to 22.0 million new cases in the year 2030 from 14.1 million cases in 2012. Since 2010, cancers are estimated to have been the leading cause of death. In the United States, cancer is the second leading cause of death after heart disease. Cancers can be broadly divided into two groups: solid tumor cancers, which are characterized by the growth of malignant tumors within the body in areas such as the brain, lung, liver, breast or prostate, and hematological, or blood-borne cancers, such as leukemia. The American Cancer Society (ACS) estimates that solid tumor cancers will account for approximately 1.5 million, or approximately 91% of new cancer cases diagnosed annually, and will account for approximately 0.5 million cancer related deaths in the United States. Traditional methods for the treatment of solid tumor cancers include chemotherapy, surgery and radiation therapy. Currently, the most common type of radiation therapy is external beam radiation therapy, in which patients are treated with high-energy radiation generated by medical equipment external to the patient. Linear accelerators, commonly referred to as linacs, have been widely used for radiation therapy for over 30 years. Linacs represent the largest product segment within the global radiation therapy equipment market which was estimated to have a market size of approximately $3.2 billion in 2013, according to the November 2013 Radiation Therapy Equipment Report by Global Industry Analysts, Inc. Increasing preference for non-surgical options is another major factor promoting radiotherapy. Approximately 60% of cancer patients worldwide will undergo some form of radiation therapy during the course of their treatment. While radiation therapy is widely available in the United States and Western Europe, many developing countries currently do not have a sufficient number of linacs to adequately treat their domestic cancer patient populations. We believe increasing demand for advanced medical treatments in many international markets and growth in cancer incidences worldwide will continue to drive demand for advanced linacs in the coming years. Radiation Therapy Radiation therapy is used to treat a wide range of cancer and tumor types. Radiation therapy works by exposing clusters of cancer cells, or tumors, to a dose of high energy radiation sufficient to cause cell death. During external beam radiation therapy, the clinician’s goal is to target radiation delivery to the tumor as precisely as possible in order to maximize the radiation dose delivered to cancerous tissue and minimize the exposure of healthy tissue. Recent advances in radiation therapy technologies have allowed clinicians to further improve the ability to target the radiation dose more precisely at cancer cells while minimizing the exposure of healthy tissue. These advances include the following: Intensity modulated radiation therapy. modulating, the radiation beam intensity across the treatment area. This technique aims to conform the high dose region of the radiation beam more closely with the shape of the tumor, enabling the delivery of higher doses of radiation to tumors with a reduced impact on surrounding healthy tissue. Intensity modulated radiation therapy involves varying, or 4 Image guided radiation therapy, or IGRT, involves delivering Image guided radiation therapy. radiation guided by images of the treatment area taken shortly before and/or during treatment using CT scan, x-ray, ultrasound or other imaging technologies. By combining imaging with radiation treatment, clinicians can adjust the patient’s position relative to the radiation source prior to each treatment to target the tumor more precisely. Radiosurgery and Stereotactic Body Radiation Therapy. Radiosurgery originated for tumors in the brain (intracranial tumors) in a single treatment session (referred to as a fraction). However, depending on the proximity of normal healthy tissue to the tumor, there was a need for delivering radiosurgery in smaller daily doses by dividing the prescription dose into one to five fractions. The ability to deliver fractionated intracranial radiosurgery was developed to meet this need. Additionally, the same tumor ablation techniques for the brain have been extended to the treatment of targets anywhere in the body, often referred to as Stereotactic Body Radiation Therapy, or SBRT. To achieve the accuracy and precision required for both radiosurgery and SBRT, image guidance during treatment and a wide range of beam angles are critical for treatment. Adaptive radiation therapy. Adaptive radiation therapy involves adjusting a patient’s radiation therapy plan during or between fractions to account for changes in the patient’s anatomy, the amount and location of the radiation received by the patient, and the size, shape and location of the tumor. While there is no widely accepted definition of adaptive radiation therapy, it has been characterized to include as little as an adjustment to the physical position of the patient relative to the radiation source prior to treatment, as occurs during IGRT, rather than an adjustment to the treatment plan. Our approach is based on the belief that adaptive radiation therapy requires monitoring and adjustments to the treatment plan facilitated by both the regular acquisition of updated quantitative images showing the location, size, shape and density of the tumor, and verification of the radiation dose received by the patient throughout the entire course of treatment. Hypofractionation. Higher doses of radiation have been shown to yield greater local control of the tumor. The advent of innovative technological features in radiation therapy treatment planning and delivery has enabled clinicians to maximize the radiation dose administered to tumors in the patient, improving local tumor control and, in some cases, improving patient survival rates. Hypofractionation is an evolving radiation therapy technique that involves reducing the number of fractions and delivering larger doses of radiation per fraction. The benefits of hypofractionation include patient convenience as a result of fewer treatment visits and more efficient use of radiation therapy systems. Stereotactic radiation therapy and stereotactic radiosurgery procedures, in which treatment is provided in one to five sessions, are extreme examples of hypofractionation. Hypofractionation has been used to date to treat only a limited number of tumor types. These tumors are generally small and are located in specific, sensitive regions of the body, such as the head and neck, spinal cord, lung and prostate, where the very high intensity radiation involved in dose escalation increases the need for a radiation delivery system that is capable of locating tumors and delivering radiation with high precision. Despite advances in radiation therapy techniques, most commercially available radiation therapy systems from other manufacturers still present significant limitations that restrict clinicians’ ability to provide the most precise treatment possible. These limitations include: Limited versatility and precision. The C-arm configuration of traditional radiation therapy systems has a limited range and speed of motion due to its size and mechanical structure. Most existing MLCs, which modulate or shape the radiation beams, have mechanical limitations that reduce their beam-shaping ability and the speed at which they operate. These design elements limit the motion and dynamic range of IMRT intensities capable of being delivered by traditional radiation therapy systems and often make it challenging to deliver radiation from the range of angles employed by more precise products. These limited treatment angles reduce the ability to deliver precisely 5 targeted radiation that minimizes exposure to healthy tissue. Such imprecision may prevent clinicians from treating tumors near sensitive anatomic structures, such as the eye or the spinal cord, or from re-treating patients in an area of the body that was previously exposed to radiation and may be unable to tolerate additional exposure. Limited ability to provide frequent, quantitative images. Precise radiation therapy requires frequent images that accurately depict the size, shape and location of the tumor. Many traditional radiation therapy systems use imaging technologies that are not generally used on a daily basis to generate a quantitative assessment of the patient’s and/or target volume’s position due to concerns about the additional radiation exposure. In addition, traditional radiation therapy systems measure the amount of radiation emitted by the device based on the system’s performance specifications. This calculation does not provide the clinician with data regarding the amount of radiation that was received by the patient or what tissue within the patient’s body received any particular amount of radiation. Since it is common for internal organs to shift and for the size of the tumor to change during the course of treatment, failure to obtain updated images and adapt the patient and/or plan throughout the course of treatment may result in a portion, or potentially all, of the radiation dose missing the tumor and instead being absorbed by healthy tissue. Failure to integrate multiple functions. The basic architecture for traditional radiation therapy systems pre-dates many recent advances and they therefore do not possess integrated imaging, treatment planning, dose verification or quality assurance capabilities necessary for more advanced treatment protocols. Some systems subsequently have been adapted to include certain elements of this functionality by incorporating modular add-on devices to legacy linac designs. These separate modular components can provide imaging, treatment planning, quality assurance procedures or post-treatment analysis functionality. However, this add-on architectural approach can have safety, accuracy, and workflow implications because the onus for checking proper operation often falls back to manual methods. Development of Radiosurgery Radiosurgery systems differ from traditional radiation therapy systems in that they are designed to deliver a very high cumulative dose of radiation, in a single or a small number of treatments precisely targeted at the tumor rather than at a region that consists of the tumor plus healthy tissue that surrounds the tumor area. The more accurate delivery of radiation allows higher doses to be delivered, increasing the probability of tumor cell death and better local control. In addition, radiosurgery can be used on patients who cannot, because of advanced age or other health reasons, tolerate traditional surgery. Our Strategy Our goal is to develop equipment and technology that allows physicians to deliver customized leading-edge treatment solutions that help cancer patients live longer, better lives. We endeavor to achieve this goal by expanding clinical opportunities for healthcare providers, helping them offer the best radiation treatment for each patient and by providing patients with treatment tailored to their specific needs. Our vision is a future where the fear, pain and suffering of cancer are a thing of the past. We believe our current technologies and our future innovation can help to achieve this. Some of the key elements of our strategy include the following: Increase physician adoption and patient awareness to drive utilization. We are continually working to increase adoption and awareness of our systems and demonstrate their advantages over more traditional treatment methods. We hold and sponsor symposia and educational meetings and support clinical studies in an effort to demonstrate the clinical benefits of our systems. We regularly meet with clinicians to educate them on the expanded versatility that our systems offer in comparison to more 6 traditional radiation therapy products. To support awareness of all of our product offerings, we assist our customers to increase patient awareness in their communities by helping them develop marketing and educational campaigns. Continue to expand the radiosurgery market. While radiosurgery has traditionally been used to treat brain tumors, the CyberKnife Systems received U.S. Food and Drug Administration, or FDA, clearance in 2001 to treat tumors anywhere in the body where radiation is indicated. Our system data demonstrate that over 55% of CyberKnife utilization is for cancers and tumors in the body in places other than the brain. There are now hundreds of peer-reviewed publications supporting use of CyberKnife in treatment of various cancer and tumor types. Continue to innovate through clinical development and collaboration. The clinical success of our products is due in large part to the collaborative partnerships we have developed over the last decade with clinicians, researchers and patients. We proactively seek out and rely on constructive feedback from system users to learn what is needed to enhance the technology. As a result of this collaborative process, we continually refine and upgrade our systems, thereby improving our competitive position in the radiation therapy and radiosurgery markets. Our upgrades are designed to address customer needs in the areas of improving the ease of use and accuracy of treatment, decreasing treatment times, and improving utilization for specific types of tumors. Expand sales in international markets. We intend to continue to increase our sales and distribution capabilities outside of the United States to take advantage of the large international opportunity for our products. We currently have regional offices in Morges, Switzerland, Paris, France, Brussels, Belgium, Hong Kong, China, Shanghai, China and Tokyo, Japan and direct sales staff in most countries in Western Europe, Japan, India and Canada. Combined with distributors in Eastern Europe, Russia, the Middle East, the Asia Pacific region and Latin America, our sales and distribution channels cover more than 92 countries. However, many of these countries are not highly developed at this time and therefore sales opportunities may be limited. We intend to increase our international revenue by focused additions of direct sales and marketing personnel in targeted areas to further penetrate our most promising international markets, and additional distributors where opportune. Strategic partnerships and joint ventures. We intend to pursue strategic partnerships and joint ventures we believe will allow us to complement our growth strategy, increase sales in our current markets and expand into adjacent markets, broaden our technology and intellectual property and strengthen our relationships with our customers. For example, in fiscal 2011, we completed the acquisition of TomoTherapy Inc., a creator of advanced radiation therapy solutions for cancer care. In July 2012, we completed the acquisition of Morphormics, Inc., a privately-held company based in North Carolina, which is a developer of medical imaging software systems. Our Products Our suite of products includes the CyberKnife(cid:3) Systems and the TomoTherapy(cid:3) Systems. The CyberKnife Systems Our principal radiosurgery products are the CyberKnife Systems, a robotic full-body radiosurgery system designed to treat tumors anywhere in the body non-invasively, which include the CyberKnife M6 Series with configuration options of fixed collimators plus iris variable aperture collimator (FI), fixed collimators plus the InCiseTM multi-leaf collimator (FM) and fixed collimators plus iris variable aperture collimator plus the InCise multi-leaf collimator (FIM). Using continual image guidance technology and computer controlled robotic mobility, the CyberKnife Systems are designed to deliver precise radiation from a wide array of beam angles and automatically track, detect and correct for tumor and patient movement in real-time throughout the 7 treatment. This design is intended to enable the CyberKnife Systems to deliver high-dose radiation with precision, which minimizes damage to surrounding healthy tissue and eliminates the need for invasive head or body stabilization frames. Our patented image-guidance technology correlates low dose, real-time treatment X-rays with images previously taken with a CT scan of the tumor and surrounding tissue to direct each beam of radiation with increased precision versus treatments without this real-time feedback. This, in turn, enables delivery of a highly conformal, non-isocentric dose of radiation to the tumor, with minimal radiation delivered to surrounding healthy tissue. With its autonomous ability to track, detect and correct for even the slightest tumor and patient movement throughout the entire treatment, the CyberKnife System is intended to provide clinicians with an effective and accurate treatment. Our newest configurations of CyberKnife Systems include the following: The CyberKnife M6 Series with configurations of FI, FM and FIM. The M6 Series is FDA approved to be used with any of the following options: an iris collimator (I) or a multi-leaf collimator (M). With the InCise(cid:5) MLC, larger tumors previously thought untreatable with radiosurgery and SBRT are able to be treated efficiently and with unrivaled accuracy and tissue sparing. The InCise MLC and IMRT planning tools enable expansion of indications that can be treated with a CyberKnife to include many IMRT indications. The CyberKnife(cid:3) M6(cid:5) Series includes disease-specific tracking and treatment delivery solutions for brain, spine, lung and prostate tumors, treatment speeding improvements, more options to configure the treatment room, expanded number of nodes leading to more coverage and sparing of healthy tissue. CyberKnife VSI System. The CyberKnife VSI System, which comes with Fixed collimators or an optional Iris collimator, is available primarily factory refurbished. The VSI System uses an intuitive planning process to enable clinicians to adapt treatment delivery to the distinct characteristics of each patient with continual image guidance. We believe the CyberKnife Systems offer clinicians and patients the following benefits: The only truly robotic system in the market. Combining the benefits of continual image guidance and non-isocentric, non-coplanar treatment delivery, the CyberKnife Systems precisely contour radiation delivery to spare healthy tissue while maintaining sub-millimeter accuracy, even for targets that move during treatment. The CyberKnife Systems are the clinical solution to choose when accuracy, flexibility, efficiency and patient comfort are essential. Treatment of inoperable or surgically complex tumors. The CyberKnife Systems may be used to target tumors that cannot be easily treated with traditional surgical techniques because of their location, number, size, shape or proximity to vital tissues or organs, or because of the age or health of the patient. The CyberKnife Systems’ intelligent robotics enable the precise targeting of a tumor, while at the same time minimizing damage to surrounding healthy tissue. Treatment of tumors throughout the body. The CyberKnife Systems have been cleared by the FDA to provide treatment planning and image-guided radiosurgery treatment for tumors anywhere in the body where radiation treatment is indicated. By comparison, traditional frame-based radiosurgery systems are generally limited to treating brain tumors. The CyberKnife Systems are being used for the treatment of primary and metastatic tumors outside the brain, including tumors on or near the spine and in the lung, liver, prostate and pancreas. Real-time tracking of tumor movement. The CyberKnife Systems are designed to enable the treatment of tumors that change position due to respiration, tumor or patient movement during treatment. The CyberKnife Systems offer the following features which enhance image guided robotic radiation surgery: Synchrony(cid:3) Respiratory Tracking System, Xsight(cid:3) Lung Tracking System, Xsight(cid:3) Spine Tracking System, InTempo(cid:5) Adaptive Imaging System and Lung Optimized Treatment (optional). 8 Significant patient benefits. Patients may be treated with the CyberKnife Systems on an outpatient basis without anesthesia and without the risks and complications inherent in traditional surgery. Patients do not require substantial pre-treatment preparation, and typically there is little to no recovery time or hospital stay associated with CyberKnife Systems’ treatments. In addition, the CyberKnife Systems eliminate the need for an invasive rigid frame to be screwed into the patient’s skull or affixed to other parts of the body, or for artificial breath holding or gating instruments. Additional revenue generation through increased patient volumes. We believe clinical use of the CyberKnife Systems allows our customers to effectively treat patients where extreme precision and ability to account for motion are important, and patients who otherwise would not have been treated with radiation or who may not have been good candidates for surgery. Therefore, we believe the treatment of these patients generates additional revenue without affecting our customers’ traditional radiation therapy practices. Upgradeable modular design. The CyberKnife Systems have a modular design, which facilitates the implementation of upgrades that generally do not require our customers to purchase an entirely new system to gain the benefits of new features. We continue to work to develop and offer new clinical capabilities enhancing ease of use, reducing treatment times, improving accuracy and improving patient access. The main components and options of the CyberKnife Systems include: the compact X-band linear accelerator; robotic manipulator, the real-time image-guidance system with continuous target tracking and correction; X-ray sources; image detectors. Key features of these components include: Robotic manipulator. The robotic manipulator arm, with six-degrees-of-freedom range of movement, is designed to move around the patient to position the linac and direct the radiation with an extremely high level of precision and repeatability. The manipulator arm provides what we believe to be a unique method of positioning the linac to deliver doses of radiation from nearly any direction and position, without the limitations inherent in gantry-based systems, creating a non-isocentric composite dose pattern with a high level of conformance to the shape of each treated tumor. This flexibility enhances the ability to diversify beam trajectories and beam entrance and exit points, helping to minimize risks of radiation damage to healthy cells near the tumor. Furthermore, the rapid response time of the manipulator arm allows tracking of tumors that move with respiration. Real-time image-guidance system with continuous target tracking and correction. Without the need for clinician intervention or treatment interruption, the CyberKnife Systems’ real-time image-guided robotics is designed to enable continuous monitoring and correction for patient and tumor movements throughout each treatment as it is being delivered. X-ray sources. The low-energy X-ray sources generate the X-ray images that help determine the location of bony or other anatomic landmarks, or implanted fiducials, which are used for tracking throughout the entire treatment. Image detectors. The image detectors capture high-resolution anatomical images throughout the treatment. These live images are continually compared to the patient’s CT scan to determine real-time patient positioning. Based on this information, the robotic manipulator automatically corrects for detected movements. In addition to the main components listed above, we also offer the following components and options: Synchrony Respiratory Tracking System; Xsight Spine Tracking System; Xsight Lung Tracking System; Lung Optimized Treatment; RoboCouch(cid:3) Patient Positioning System; Xchange Robotic Collimator Changer; Iris Variable Aperture Collimator; 4D Treatment Optimization and Planning System; InTempo Adaptive Imaging System; MultiPlan(cid:3) Treatment Planning System; MultiPlan MD Suite; CyberKnife Data Management System; MultiPlan Quick Review; Radiosurgery DICOM Interface; Monte Carlo Dose Calculation; Sequential Optimization Treatment Planning; Robotic 9 IMRTTM; AutoSegmentation; QuickPlan; PlanTouchTM; and the InCiseTM Multi-leaf Collimator. Key features of these components are as follow: Synchrony Respiratory Tracking System. The CyberKnife Systems’ proprietary motion tracking system, the Synchrony(cid:3) Respiratory Tracking System, is used to continuously track tumors that move with respiration as beams are synchronized in real-time to tumor position while adapting to changes in breathing patterns, allowing for the delivery of highly conformed radiation beams while reducing areas of healthy tissue exposed to radiation. The Synchrony system provides what we believe is unsurpassed clinical accuracy of approximately 1.5 millimeters for tumors that move with respiration without the need for implanted fiducials. Iris Variable Aperture Collimator. The Iris Variable Aperture Collimator enables delivery of beams in 12 unique sizes with a single collimator, which significantly reduces treatment times and the total radiation dose delivered to the patient. 4D Treatment Optimization and Planning System. The 4D Treatment Optimization and Planning System is designed to optimize treatment by taking into account the movement of the tumor and the movement and change in shape of the surrounding tissue, thereby minimizing margins and radiation exposure to healthy tissue. MultiPlan Treatment Planning System. The MultiPlan System generates a series of beams and calculates the dose that must be delivered from each beam and provides these as a treatment plan. The treatment plan defines the pattern of radiation that meets the physician’s dose prescription. The MultiPlan system uses input images from multiple modalities, including computed tomography, or CT, magnetic resonance imaging, or MRI, positron emission tomography, or PET, and 3D angiography. CyberKnife Data Management System. The results of a patient’s treatment delivery, such as dose delivered from each beam, each path and each fraction, and details about the images acquired and corrections applied are recorded and stored in the data management system. Radiosurgery DICOM Interface. Data management systems, such as the CyberKnife Data Management System, utilize industry-standard interface protocols, such as DICOM, to export patient information to the OIS. With the Radiosurgery DICOM Interface, the CyberKnife Systems complete the Oncology Information System (OIS) electronic medical record with a comprehensive export of the radiosurgery treatment history. Monte Carlo Dose Calculation. Our Monte Carlo Dose Calculation software uses Monte Carlo simulation algorithms in treatment planning and dose calculation. Our Monte Carlo dose calculation algorithm can perform the necessary treatment planning calculations in a significantly shorter time frame as compared to conventional Monte Carlo dose calculation methods, thereby accelerating the treatment planning process. QuickPlan. Our QuickPlan(cid:3) technology allows for a complete treatment plan to be generated automatically, and the results presented to the user for review. PlanTouch. PlanTouch(cid:5)is the first commercially available, fully integrated software application in radiation oncology that allows physicians to remotely review and approve patients’ radiation treatment plans on the iPad. InCise(cid:5) Multi-leaf Collimator. The InCise multi-leaf collimator is designed specifically for SRS and SBRT treatments, giving the system the capability to extend its radiosurgical accuracy into a broader field of applications, meeting radiosurgery and radiotherapy needs. With the InCise MLC, the CyberKnife M6 Series can be used to treat larger and irregular tumors more efficiently. Currently, our internal testing of the InCise MLC has been concluded to our satisfaction and we have begun our 10 evaluation of the MLC in the field, with the goal of ensuring that we introduce a clinically effective and reliable collimator. The TomoTherapy Systems The TomoTherapy Systems include the new TomoTherapy H Series with configuration options of TomoH(cid:5), TomoHD(cid:5) and TomoHDA(cid:5). The TomoTherapy Systems consist of fully integrated and versatile radiation therapy systems used by healthcare professionals in the treatment of a wide range of cancer types. We believe the TomoTherapy Systems offer clinicians and patients the following benefits: Versatile treatment capabilities. The TomoTherapy Systems’ ring gantry platform enables precise and efficient treatments with a high degree of dose conformality. The high-speed binary MLC is integrated with the linac and consists of 64 individual low leakage tungsten leaves that move across the beam to either block or allow the passage of radiation, effectively shaping the beam as it is emitted. The combination of the ring gantry and the high-speed MLC (which we refer to as TomoHelicalTM) allow treatment to be delivered continuously in a 360-degree helical pattern around the patient’s body. Moreover, the TomoDirectTM feature provides the TomoTherapy Systems added versatility to provide high quality, fixed angle beams for those cases suited to simple tangential beam radiation delivery. In addition, all TomoTherapy Systems enable an operator to provide non-isocentric three-dimensional conformal image-guided IMRT or stereotactic treatments within a typical cylindrical volume of 80 centimeters in diameter and up to 135 centimeters in length. This expansive treatment field allows large areas of the body to be treated in a single session and the treatment of widely distant tumors. The TomoTherapy Systems’ versatility, efficiency and precision offer clinicians an extensive range of effective treatment possibilities. Daily, quantitative imaging for better identification of tumors, dose verification and treatment planning. The TomoTherapy Systems offer integrated quantitative CT imaging capabilities, which depict the density of tumors and healthy tissue more accurately than traditional radiation therapy systems. Our integrated mega-voltage computed tomography, or MVCT, which we market as our CTrue(cid:5) imaging technology, uses a low-intensity, fan beam CT to collect quantitative images prior to each treatment. These images allow lung tissue, fat, muscle and bone to be clearly distinguished. In addition, because of the low radiation dose involved, the clinician can collect daily, quantitative images, which can be used to monitor changes in the patient’s internal anatomy and quickly adapt the plan if deemed clinically necessary. We believe daily, quantitative, relatively low dose images are essential to optimizing patient treatment by enabling clinicians to adapt the treatment plan in response to anatomical changes. Integrated treatment system for precise radiation delivery. We believe the integration of our CT imaging technology, treatment planning and helical delivery mode of radiation beams enables highly accurate and precise radiation delivery. Our adaptive software allows clinicians to establish at the time of treatment the contours of a tumor and any sensitive structures at risk. The TomoTherapy Systems use a highly efficient dose optimization algorithm to ensure the radiation beam conforms to the patient’s tumor and minimizes exposure to sensitive healthy tissue structures, providing a highly- targeted dose distribution. These features significantly benefit patients by increasing the radiation delivered to cancerous tissues while reducing damage to nearby healthy tissues. Efficient clinical workflow for Image Guided Radiation Therapy, or IGRT, and adaptive radiation therapy. The TomoTherapy Systems integrate into a single system all of the key elements for radiation therapy, including treatment planning, CT image-guided patient positioning, treatment delivery, quality assurance and adaptive planning. The imaging and treatment planning capabilities of many traditional systems are more modular or require cumbersome add-ons or separate treatment planning systems that result in clinicians taking more steps between scanning, planning and treatment of patients. Conversely, the integrated imaging and treatment features of the TomoTherapy Systems allow clinicians to scan, plan and treat cancer patients efficiently. Daily images can be easily accessed remotely, via our 11 TomoPortal(cid:5) web-enabled interface, to verify patient positioning and collaboratively define patient treatment strategies. Taking advantage of this integration capability, our StatRT(cid:5) software allows the full radiation therapy process—CT scanning, treatment planning and treatment delivery—to be completed rapidly. Low barriers to installation and implementation. All external beam radiation systems must be housed in rooms which have special radiation shielding to capture any radiation not absorbed by the patient. The TomoTherapy Systems’ size and self-contained design allow customers to retrofit it into existing treatment rooms previously used for legacy radiation therapy systems and avoid, or reduce, the significant construction costs that can be associated with building new, larger treatment rooms, which are often required to install many other radiation therapy systems. With both imaging and radiation delivery capabilities in its ring gantry, the TomoTherapy Systems require less space than other linac systems, which use large moving arms to position the linac or incorporate adjacent imaging equipment used for treatment planning. In addition, because the TomoTherapy Systems have an integrated radiation beam stop, which captures radiation that passes through the patient, it requires less radiation shielding in treatment room walls as compared to the shielding required by a traditional system. We also preassemble, test and commission each TomoTherapy Systems at our manufacturing facility, and ship the system almost fully assembled. This assembly process typically allows radiation ‘‘beam on’’ within four days after delivery and first patient treatments to begin within 30 to 45 days after delivery. Platform for further technological advancements in adaptive radiation therapy. We believe the TomoTherapy Systems are uniquely positioned to enable truly adaptive radiation therapy because of its unique ability to provide daily, quantitative images, high speed delivery of radiation from fixed beam angles or helically from 360 degrees around the body and real-time verification of the dose received by the patient. We believe the combination of these design features and our integrated treatment planning and optimization software will allow us to continue to enhance the TomoTherapy Systems’ adaptive capabilities to enable clinicians to routinely and easily adjust a patient’s treatment as needed, thereby remaining true to the intent of the original treatment plan. In addition to the functionality listed above, the TomoTherapy Systems may be enhanced with the following product options: TomoDirectTM Treatment Mode; Planned Adaptive; OIS Connect(cid:5); TomoTherapy Remote Software Solutions (Remote Planning and TomoPortal); TomoQuality Assurance (TQATM) Package; VoLOTM Technology; TomoEdge Dynamic Jaws. Key features of these options are as follow: TomoDirect Treatment Mode. The TomoDirect mode is a discrete angle, non-rotational delivery mode for the TomoTherapy Systems that allows the user to create a treatment plan that defines up to twelve target-specific gantry angles. Treatment planning is completed rapidly by all beams for each target being delivered sequentially with the couch passing through the bore of the system at an appropriate speed for each gantry angle. The TomoDirectTM mode enables users to plan and treat routine cases with greater efficiency, while achieving the quality of TomoTherapy’s unique beamlet- based delivery. OIS Connect software option. The OIS Connect software option is a DICOM standard-based solution that provides the ability to interface a TomoTherapy Systems to a compatible OIS. Tomo Quality Assurance (TQA) package. The TQA application offers trending and reporting of many system and dosimetric parameters that allow physicists to monitor the performance of their TomoTherapy Systems. VoLO Technology. The VoLO Technology is a treatment planning system that leverages advanced graphics processing technology and a new calculation algorithm to increase clinical efficiency, throughput and flexibility in developing even the most complex radiation plans. This solution features 12 high-speed parallel processing for both dose calculation and optimization, based on Graphics Processing Unit (GPU) technology. In addition, VoLO represents the first use of a new Non-Voxel Broad Beam (NVBB) calculation algorithm that takes advantage of both the GPU’s unparalleled speed and the TomoTherapy Systems unique beamlet radiation delivery system to develop dose distributions from the perspective of each beamlet (up to tens of thousands in any given plan) as they pass through the patient’s body. VoLO technology empowers clinicians to create highly customized treatment plans in less time, with greater flexibility to work interactively and in real time to efficiently develop the best IMRT treatment plans for even the most complex cases. TomoEdge Dynamic Jaws. TomoEdge is standard on the TomoTherapy HDA model and is also available on H and HD models. By dynamically varying the width of the collimator jaws during treatment delivery, dose to normal tissues immediately adjacent to the tumor is reduced, contributing to the minimization of radiation side effects. Additionally, overall irradiation time is shortened because the jaws are allowed to open more broadly throughout much of the delivery. The resulting gains in treatment quality and speed expand the TomoTherapy Systems clinical and market reach within the conventional and stereotactic radiotherapy spaces. Sales and Marketing In the United States, while we primarily market to customers directly through our sales organization, we also market to customers through sales agents 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 throughout the world. In direct sales markets, we employ a combination of territory sales managers, product specialists, training specialists and marketing managers. Territory sales managers and product specialists are responsible for selling the systems to hospitals and stand-alone treatment facilities. Our marketing managers help market our current products and work with our engineering group to identify and develop upgrades and enhancements for our suite of products. Our training specialists train radiation oncologists, surgeons, physicists, dosimetrists and radiation therapists. Additionally, we have sales specialists dedicated to selling upgrades and service to our installed base customers. In addition to marketing to hospitals and stand-alone treatment facilities, we market to radiation oncologists, neurosurgeons, general surgeons, oncology specialists and other referring physicians. We intend to continue to increase our focus on marketing and education efforts to surgical specialists and oncologists responsible for treating tumors throughout the body. Our marketing activities also include efforts to inform and educate cancer patients about the benefits of the CyberKnife and TomoTherapy Systems. Under our standard distribution agreement, we generally appoint an exclusive distributor for a specific country. We typically also retain the right to distribute the CyberKnife and TomoTherapy Systems in such territories, though we remain bound by certain agreements entered into by TomoTherapy prior to our acquisition that did not retain such rights in certain jurisdictions. Our distributors generally provide the full range of service and sales capabilities, although we may provide installation and service support for certain distributors. From time to time, we may provide our CyberKnife Systems’ linac for use in non-medical areas. These areas may include non-destructive testing, visual inspection and other potential applications. We do not currently expect these non-medical uses to represent a significant portion of our revenue in the near term nor have they historically represented a significant portion of our revenues. 13 Manufacturing We purchase major components for each of our products from outside suppliers, including the robotic manipulator, treatment couches, gantry, magnetrons and computers. We closely monitor supplier quality, delivery performance and conformance to product specifications, and we also expect suppliers to contribute to our efforts to improve our manufacturing cost and quality. Some of the components are obtained from single-source suppliers. These components include the gantry, couch, magnetron and solid state modulator for the TomoTherapy Systems and the robot, couch, magnetron and MLC for the CyberKnife Systems. In most cases, if a supplier was unable to deliver these components, we believe we would be able to find other sources for these components subject to any regulatory qualifications, if required. In the event of a disruption in any of these suppliers’ ability to deliver a component, we would need to secure a replacement supplier. Additionally, any disruption or interruption of the supply of key subsystems could result in increased costs and delays in deliveries of our treatment systems, which could adversely affect our reputation and results of operations. To help mitigate these risks, we negotiate long-term supply contracts or submit long-term orders and forecasts to our single-source suppliers with the goal that our demand can be satisfied and any capacity problem can be mitigated. Currently, we manufacture our CyberKnife Systems and corresponding linacs at our Sunnyvale, California facility. At the end of fiscal 2014, we began transitioning production of our CyberKnife Systems, excluding certain linear accelerator production, from our manufacturing facilities in Sunnyvale, California, to our facilities in Madison, Wisconsin, and expect to finish the transition by the end of calendar year 2014. We manufacture our TomoTherapy Systems in Madison, Wisconsin. We manufacture the linac for our TomoTherapy Systems at our Chengdu, China facility. Our facilities employ state-of-the-art manufacturing techniques and equipment. Our company-wide quality systems are certified independently and compliant to the internationally recognized quality system standard for medical devices, International Standards Organization, or ISO, 13485:2003, and the Quality System regulations enforced by the FDA. We believe our manufacturing facilities will be adequate for our expected growth and foreseeable future demands for at least the next three years. The manufacturing processes at our facilities include fabrication, subassembly, assembly, system integration and final testing. Our manufacturing personnel consist of fabricators, assemblers and technicians supported by production engineers as well as planning and supply chain managers. Our quality assurance program includes various quality control measures from inspection of raw material, purchased parts and assemblies through on-line inspection. We have also incorporated lean manufacturing techniques to improve manufacturing flow and efficiency. Lean manufacturing techniques include reducing wasteful and extraneous activities, balancing assembly and test flow, as well as better utilizing production assets and resources. Intellectual Property The proprietary nature of, and protection for, our products, product components, processes and know-how are important to our business. We seek patent protection in the United States and internationally for our systems and other technology where available and when appropriate. We may also in-license the technology, inventions and improvements that we consider important to the development of our business. In addition, we also rely upon trade secrets, know-how, trademarks, copyright protection, as well as confidentiality agreements with employees, consultants and other third parties, to protect our proprietary rights and to develop and maintain our competitive position. As of June 30, 2014, we held exclusive field of use licenses or ownership of approximately 313 U.S. and foreign patents, and approximately 95 U.S. and foreign patent applications. These patents and applications cover various components and techniques incorporated into the CyberKnife and TomoTherapy Systems, or which may be incorporated into new technologies under current 14 development, all of which we believe will allow us to maintain a competitive advantage in the field of radiation therapy systems. We cannot be certain that any patents will be issued from any of our pending patent applications, nor can we be certain that any of our existing patents or any patents that may be granted to us in the future will provide us with protection. We periodically monitor the activities of our competitors and other third parties with respect to their use of intellectual property. Research and Development Continued innovation is critical to our future success. Our current product development activities include projects expanding clinical applications, driving product differentiation, and continually improving the usability, interoperability, reliability, and performance of our products. We continue to seek to develop innovative technologies so that we can increase our sales. Some of our product improvements have been discussed above under the heading ‘‘Products.’’ Research activities strive to enable new product development opportunities by developing new technologies and advancing areas of existing core technology such as next generation linac, adaptive therapy, patient imaging, motion management, or treatment planning capabilities. The modular design of our systems supports rapid development for new clinical capabilities and performance enhancements by generally allowing each subsystem to evolve within the overall platform design. Access to regular product upgrades protects customer investment in the system, facilitates the rapid adoption of new features and capabilities among existing installed base customers, and drives increasing value in our multiyear service plans. These upgrades will generally consist of software and hardware enhancements designed to increase the ease of use of our systems, improve the speed and accuracy of patient treatment and meet other customer needs. As of June 30, 2014, we had 206 employees in our research and development departments. Research and development expenses for the fiscal years ended June 30, 2014, 2013 and 2012 were $53.7 million, $66.2 million and $81.3 million, respectively. We anticipate research and development expenses for fiscal 2015 to be higher than in fiscal 2014 based on the current schedule of our development projects. A key component of our research and development program is our collaboration with research programs at selected hospitals, cancer treatment centers, academic institutions and research institutions worldwide. Our agreements with these third-party collaborators generally require us to make milestone- based payments during the course of a particular project and often also require that we make up-front payments to fund initial activities. Generally, we obtain non-exclusive worldwide rights to commercialize results from the collaboration with an option to negotiate an exclusive license. For inventions resulting from the collaboration owned or exclusively licensed by Accuray, we generally grant a royalty-free license for the purpose of continuing the institution’s research and development, and from time to time, we also grant broader licenses. Our research collaboration programs include work on clinical protocols and hardware and software developments. We also work with suppliers to develop new components in order to increase the reliability and performance of our products and seek opportunities to acquire or invest in the research of other parties where we believe it is likely to benefit our existing or future products. Competition The medical device industry in general and the non-invasive cancer treatment field in particular are subject to intense and increasing competition and rapidly evolving technologies. Because our products often have long development and regulatory clearance and approval cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. To 15 compete successfully, we will need to continue to demonstrate the advantages of our products and technologies over well-established alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. Traditional surgery and other forms of minimally invasive procedures, brachytherapy, chemotherapy and other drugs remain alternatives to the CyberKnife and TomoTherapy Systems. New product sales in this competitive market are primarily dominated by two companies: Elekta AB and Varian Medical Systems, Inc., or Varian. Some manufacturers of standard linac systems, including Varian and Elekta, have products that can be used in combination with body and/or head frame systems and image-guidance systems to perform both radiosurgical and radiotherapy procedures. Other companies that compete with Accuray to a lesser extent include Mitsubishi Heavy Industries, BrainLAB AG, and ViewRay Inc. Furthermore, many government, academic and business entities are investing substantial resources in research and development of cancer treatments, including surgical approaches, radiation treatment, MRI-guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy, and other approaches. Successful developments that result in new approaches for the treatment of cancer could reduce the attractiveness of our products or render them obsolete. Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapid technological development may render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have or may have greater corporate, financial, operational, sales and marketing resources, and more experience in research and development than we have. We cannot assume that our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or that would render our technologies and products obsolete or less useful. We may not have the financial resources, technical expertise, marketing, distribution or support capabilities to compete successfully in the future. Our competitive position also depends, among other things, on: (cid:127) Widespread awareness, acceptance and adoption of our products by the radiation oncology and cancer therapy markets; (cid:127) Innovations that improve the effectiveness and productivity of our systems’ treatment processes and enable them to address emerging customer needs; (cid:127) Availability of reimbursement coverage from third-party payors (including insurance companies, governments, and/or others) for procedures performed using our systems; (cid:127) Published, peer-reviewed data supporting the efficacy and safety of our systems; (cid:127) Limiting the time required from proof of feasibility to routine production; (cid:127) Limiting the time period and cost of regulatory approvals or clearances; (cid:127) The manufacture and delivery of our products in sufficient volumes on time, and accurately predicting and controlling costs associated with manufacturing, installation, warranty and maintenance of the products; (cid:127) Our ability to attract and retain qualified personnel; (cid:127) The extent of our intellectual property protection or our ability to otherwise develop proprietary products and processes; (cid:127) Securing sufficient capital resources to expand both our continued research and development, and sales and marketing efforts; and 16 (cid:127) Obtaining and maintaining any necessary United States or foreign regulatory approvals or clearances. Our customers’ equipment purchase considerations typically include reliability, treatment quality, service capabilities, patient throughput, price, payment terms and equipment supplier viability. We believe we compete favorably with our competitors on price and value based upon the technology offered by our treatment systems. We strive to provide a technologically superior product that covers substantially all aspects of radiation therapy to deliver precise treatments with high-quality clinical outcomes that meet or exceed customer expectations. In addition to competition from technologies performing similar functions as our treatment systems, competition also exists for the limited capital expenditure budgets of our customers. For example, our treatment systems may compete with other equipment required by a radiation therapy department for financing under the same capital expenditure budget, which is typically limited. A purchaser, such as a hospital or cancer treatment center, may be required to select between the two items of capital equipment. Our ability to compete may also be adversely affected when purchase decisions are based solely upon price, since our products are premium-priced systems due to their higher level of functionality and performance. US Reimbursement In the United States, healthcare providers that purchase capital equipment such as the CyberKnife and TomoTherapy Systems generally rely on government and private third-party payors for reimbursement for the healthcare treatment and services they provide. Examples of these types of payors include Medicare, Medicaid, private health insurance plans, and health maintenance organizations, which reimburse all or a portion of the cost of treatment, as well as related healthcare services. Reimbursement involves three components: coverage, coding and payment. Coverage Approximately 55% of patients treated in the United States with the CyberKnife and TomoTherapy Systems are covered through Medicare/Medicaid, rather than through private insurance. There are currently no national coverage determinations in place under Medicare for CyberKnife or TomoTherapy treatment. Coverage criteria for treatment with CyberKnife and TomoTherapy are outlined in local determinations or, in the absence of a formal policy, treatment is covered as long as it is considered reasonable and necessary. The most common indications covered by Medicare in local coverage determinations for robotic radiosurgery are primary and metastatic tumors in the brain, spine, lung, liver, kidney, pancreas, adrenal gland, prostate as well as other cancers that have failed previous treatment. Intensity Modulated Radiation Therapy is generally covered for cancers of the brain, spine, head and neck, prostate, thoracic, abdominal and retroperitoneal regions, other cancers (e.g. breast) meeting certain criteria, and tumors requiring re-irradiation or where dose tolerance may be exceeded with conventional treatment. Commercial payor policies vary with most covering radiosurgery for tumors in the brain, spine, lung, and increasingly prostate. Other indications such as renal, liver, and pancreatic cancers are also covered by some national and local commercial payors. IMRT and 3D Conformal are typically covered by commercial payors for the indications covered by Medicare. 17 Coding The codes that are used to report radiosurgery treatment delivery in 2014 for the hospital outpatient department are Current Procedural Terminology (CPT) codes 77372 and 77373 for single fraction intracranial radiosurgery and multi-session radiosurgery/stereotactic body radiation therapy. For 2015, no significant changes have been proposed by Centers for Medicare and Medicaid Services (CMS) for multisession SRS/SBRT over 2014. For single session cranial SRS, CMS proposes to pay for all services delivered on the day of treatment delivery through a comprehensive Ambulatory Payment Classification (APC). For freestanding centers, CMS has proposed to eliminate the Healthcare Common Procedural Codes (HCPCs) G codes that are currently regionally priced by Medicare Contractors and adopt CPT codes 77372 and 77373, currently in use in the hospital outpatient setting. CMS has not proposed a comprehensive ‘‘lump sum’’ payment scheme as it has proposed for single session cranial SRS in the hospital. IMRT delivery is billed under CPT code 77418. 3D Conformal treatment is typically billed by TomoTherapy users under CPT code 77413. In 2015 CMS will likely implement new codes for IMRT and 3D conformal which will reflect simple and complex treatment for IMRT and simple, intermediate, and complex treatment with 3D conformal. Both HCPCS and CPT codes are still listed as valid codes in commercial payer policies. Other codes are used to report treatment planning, dosimetry, treatment management, and other procedures routinely performed for treating radiosurgery or radiotherapy patients. Payment The majority of procedures using the CyberKnife and TomoTherapy Systems are performed in the hospital outpatient department. Medicare payment for CyberKnife and TomoTherapy procedures delivered in the hospital outpatient setting is developed by CMS, which calculates rates based on costs submitted by hospitals to perform outpatient procedures. Every year, CMS reviews hospital cost data for outpatient procedures, including radiosurgery and radiotherapy, makes adjustments to rates for the following year, and publishes national unadjusted averages for all procedures eligible for payment in this site of service. Payment for treatment with CyberKnife and TomoTherapy Systems are also available in the freestanding center settings. In 2014, the primary treatment delivery codes for robotic radiosurgery are carrier priced under Medicare and range from low payment to payment at parity with hospital outpatient departments to slightly above outpatient rates. TomoTherapy procedures are set by CMS and the American Medical Association nationally, with adjustments to account for geographic market variations. The federal government and Congress review and adjust rates annually, and from time to time consider various Medicare and other healthcare reform proposals that could significantly affect both private and public reimbursement for healthcare services, including radiotherapy and radiosurgery, in hospitals and free-standing clinics. In the past, we have seen our customers’ decision-making process complicated by the uncertainties surrounding reimbursement rates for radiotherapy and radiosurgery in the United States. State government reimbursement for services is determined pursuant to each state’s Medicaid plan, which is established by state law and regulations, subject to requirements of federal law and regulations. Foreign Reimbursement Internationally, reimbursement and healthcare payment systems vary from country to country and include single-payor, government-managed systems as well as systems in which private payors and government-managed systems exist side-by-side. In general, the process of obtaining coverage approvals has been slower outside of the United States. Our ability to achieve adoption of our treatment systems, 18 and significant sales volume in international markets, will depend in part on the availability of reimbursement for procedures performed using our products. Regulatory Matters Domestic Regulation Our products and software are medical devices subject to regulation by the FDA, as well as other regulatory bodies. FDA regulations govern the following activities that we perform and will continue to perform to ensure medical products distributed domestically or exported internationally are safe and effective for their intended uses: (cid:127) Product design and development; (cid:127) Document and purchasing controls; (cid:127) Production and process controls; (cid:127) Labeling and packaging controls; (cid:127) Product storage; (cid:127) Recordkeeping; (cid:127) Servicing; (cid:127) Corrective and preventive action and complaint handling; (cid:127) Pre-market clearance or approval; (cid:127) Advertising and promotion; and (cid:127) Product sales and distribution. FDA pre-market clearance and approval requirements. Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either 510(k) clearance or pre-market approval from the FDA. The FDA classifies medical devices into one of three classes. Devices deemed to pose lower risks are placed in either class I or II, which requires the manufacturer to submit to the FDA a pre-market notification requesting permission to commercially distribute the device, known as 510(k) clearance. Some low risk devices are exempted from this requirement. Devices deemed by the FDA to pose the greatest risks, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a previously cleared 510(k) device, are placed in class III, requiring pre-market approval. All of our current products are class II devices requiring 510(k) clearances. 510(k) clearance pathway. When a 510(k) clearance is required, we must submit a pre-market notification demonstrating that our proposed device is substantially equivalent to a previously cleared and legally marketed 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of pre-market approval applications, or PMA. By regulation, the FDA is required to clear or deny a 510(k) pre-market notification within 90 days of submission of the application. Clearance generally takes longer as the FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. In January 2002, we received 510(k) clearance for the TomoTherapy Hi-Art System intended to be used as an integrated system for the planning and delivery of IMRT for the treatment of cancer. In August 2008, we received 510(k) clearance for our TomoDirectTM System. In July 1999, we received 510(k) clearance for the CyberKnife System for use in the head and neck regions of the body. In August 2001, we received 510(k) clearance for the CyberKnife System to 19 provide treatment planning and image guided stereotactic radiosurgery and precision radiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment is indicated. In April 2002, we received 510(k) clearance for the Synchrony Motion Tracking System as an option to the CyberKnife System, intended to enable dynamic image guided stereotactic radiosurgery and precision radiotherapy of lesions, tumors and conditions that move under influence of respiration. Pre-market approval (PMA) pathway. A PMA must be submitted to the FDA if the device is not eligible for the 510(k) clearance process. A PMA must be supported by extensive data, including but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate reasonable evidence of the device’s safety and efficacy to the FDA’s satisfaction. Currently, no device we have developed and commercialized has required pre-market approval. Product modifications. After a device receives 510(k) clearance or a PMA approval, any modification that could significantly affect its safety or effectiveness, or that would constitute a significant change in its intended use, will require a new clearance or approval. The FDA has issued draft guidance that, if finalized and implemented, will result in manufacturers needing to seek a significant number of new clearances for changes made to legally marketed devices. We have modified aspects of our CyberKnife and TomoTherapy families of products since receiving regulatory clearance, and we have applied for and obtained additional 510(k) clearances for these modifications when we determined such clearances were required. The FDA requires each manufacturer to make this determination initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with our determination not to seek a new 510(k) clearance or PMA approval, the FDA may require us to seek 510(k) clearance or PMA approval. The FDA could also require us to cease marketing and distribution and/or recall the modified device until 510(k) clearance or pre-market approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. During our fiscal year ended June 30, 2013, we submitted one 510(k) clearance notification for modifications made to the operation of the CyberKnife System and one 510(k) clearance notification for the TomoTherapy System. The CyberKnife submission was cleared on October 26, 2012 and the TomoTherapy submission was cleared on August 29, 2012. Pervasive and continuing regulation. After a device is placed on the market, numerous regulatory requirements apply. These include: (cid:127) Quality System Regulation, or QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, documentation and other quality assurance procedures during product design and throughout the manufacturing process; (cid:127) Labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses; and (cid:127) Medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. The FDA has broad post-market and regulatory enforcement powers. We are subject to unannounced inspections by the FDA and the Food and Drug Branch of the California Department of Health Services to determine our compliance with the QSR and other regulations, and these inspections may include the manufacturing facilities of some of our subcontractors. In June 2012, during an inspection performed by the FDA at our Sunnyvale facility, several minor observations of non-compliance were made. The initial classification of the inspection is considered to be Voluntary Action Indicated. We are undertaking corrective action in response to the FDA’s observations and the FDA will reevaluate our correction actions upon reinspection. We believe there were no observations 20 that involved a material violation of regulatory requirements. In July 2012, the FDA completed an inspection at our Madison facility, and no observations were noted. We believe we are in substantial compliance with the QSR. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions: (cid:127) Fines, injunctions, consent decrees and civil penalties; (cid:127) Recall or seizure of our products; (cid:127) Operating restrictions, partial suspension or total shutdown of production; (cid:127) Refusing our requests for 510(k) clearance or pre-market approval of new products or new intended uses; (cid:127) Withdrawing 510(k) clearance or pre-market approvals that are already granted; and (cid:127) Criminal prosecution. The FDA also has the authority to require us to repair, replace or refund the cost of any medical device that we have manufactured or distributed. If any of these events were to occur, they could have a material adverse effect on our business. Radiological health. Because our CyberKnife and TomoTherapy Systems contain both laser and X-ray components, and because we assemble these components during manufacturing and service activities, we are also regulated under the Electronic Product Radiation Control Provisions of the Federal Food, Drug, and Cosmetic Act. This law requires laser and X-ray products to comply with regulations and applicable performance standards, and manufacturers of these products to certify in product labeling and reports to the FDA that their products comply with all such standards. The law also requires manufacturers to file new product reports, and to file annual reports and maintain manufacturing, testing and sales records, and report product defects. Various warning labels must be affixed. Assemblers of diagnostic X-ray systems are also required to certify in reports to the FDA, equipment purchasers, and where applicable, to state agencies responsible for radiation protection, that diagnostic and/or therapeutic X-ray systems they assemble meet applicable requirements. Failure to comply with these requirements could result in enforcement action by the FDA, which can include injunctions, civil penalties, and the issuance of warning letters. Fraud and abuse laws. We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by significant criminal and civil sanctions, including, in some instances, exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. Because of the far-reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our practices to be in compliance with these laws. Evolving interpretations of current laws, or the adoption of new federal or state laws or regulations could adversely affect many of the arrangements we have with customers and physicians. In addition, there can be no assurance that the occurrence of one or more violations of these laws or regulations would not result in a material adverse effect on our financial condition and results of operations. Anti-kickback laws. Our operations are subject to broad and changing federal and state anti-kickback laws. The Office of the Inspector General of the Department of Health and Human Services, or the OIG, is primarily responsible for enforcing the federal Anti-Kickback Statute and generally for identifying fraud and abuse activities affecting government programs. The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging of a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid. ‘‘Remuneration’’ has been broadly 21 interpreted to include anything of value, including such items as gifts, discounts, the furnishing of supplies or equipment, credit arrangements, waiver of payments, and providing anything of value at less than fair market value. Penalties for violating the federal Anti-Kickback Statute include criminal fines of up to $25,000 and/or imprisonment for up to five years for each violation, civil fines of up to $50,000 and possible exclusion from participation in federal healthcare programs such as Medicare and Medicaid. Many states have adopted prohibitions similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs, and do not include comparable exceptions. The OIG has issued safe harbor regulations which set forth certain activities and business relationships that are deemed safe from prosecution under the federal Anti-Kickback Statute. There are safe harbors for various types of arrangements, including, without limitation, certain investment interests, leases and personal services and management contracts. The failure of a particular activity to comply in all regards with the safe harbor regulations does not mean that the activity violates the federal Anti-Kickback Statute or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG. The OIG has identified the following arrangements with purchasers and their agents as ones raising potential risk of violation of the federal Anti-Kickback Statute: (cid:127) Discount and free good arrangements that are not properly disclosed or accurately reported to federal healthcare programs; (cid:127) Product support services, including billing assistance, reimbursement consultation and other services specifically tied to support of the purchased product, offered in tandem with another service or program (such as a reimbursement guarantee) that confers a benefit to the purchaser; (cid:127) Educational grants conditioned in whole or in part on the purchase of equipment, or otherwise inappropriately influenced by sales and marketing considerations; (cid:127) Research funding arrangements, particularly post-marketing research activities, that are linked directly or indirectly to the purchase of products, or otherwise inappropriately influenced by sales and marketing considerations; and (cid:127) Other offers of remuneration to purchasers that are expressly or impliedly related to a sale or sales volume, such as ‘‘prebates’’ and ‘‘upfront payments,’’ other free or reduced-price goods or services, and payments to cover costs of ‘‘converting’’ from a competitor’s products, particularly where the selection criteria for such offers vary with the volume or value of business generated. We have a variety of financial relationships with physicians who are in a position to generate business for us. For example, physicians who own our stock also provide medical advisory and other consulting and personal services. Similarly, we have a variety of different types of arrangements with our customers. In the case of our former placement program, certain services and upgrades were provided without additional charge based on procedure volume. In the past, we have also provided loans to our customers. We also provide research grants to customers to support customer studies related to, among other things, our CyberKnife and Tomotherapy Systems. If our past or present operations are found to be in violation of the federal Anti-Kickback Statute or similar government regulations to which we or our customers are subject, we or our officers may be subject to the applicable penalty associated with the violation, including significant civil and criminal penalties, damages, fines, imprisonment, and exclusion from the Medicare and Medicaid programs. The impact of any such violation may lead to curtailment or restructuring of our operations. Any penalties, damages, fines, or curtailment or restructuring of our operations could adversely affect our ability to 22 operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that some of these laws are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation. If an enforcement action were to occur, our reputation and our business and financial condition could be harmed, even if we were to prevail or settle the action. Similarly, if the physicians or other providers or entities with which we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business. Transparency laws. The Physician Payment Sunshine Act, or the Sunshine Act, which was enacted by Congress as part of the Patient Protection and Affordable Care Act on December 14, 2011, requires each applicable manufacturer, which includes medical device companies such as Accuray, to track and report to the federal government on an annual basis all payments and other transfers of value from such applicable manufacturer to U.S. licensed physicians and teaching hospitals as well as physician ownership of such applicable manufacturer’s equity, in each case subject to certain statutory exceptions. Such data will be made available by the government on a publicly searchable website. Failure to comply with the data collection and reporting obligations imposed by the Sunshine Act can result in civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum of $150,000 per reporting period) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum of $1 million per reporting period). In addition, we are subject to similar state and foreign laws related to the tracking and reporting of payments and other transfers of value to healthcare professionals. These laws require or will require that we implement the necessary and costly infrastructure to track and report such payments and transfers of value. Failure to comply with these new tracking and reporting laws could subject us to significant civil monetary penalties. Physician self-referral laws. We are also subject to federal and state physician self-referral laws. The federal Ethics in Patient Referrals Act of 1989, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain ‘‘designated health services’’ if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. In addition, in July 2008, CMS issued a final rule implementing significant amendments to the regulations under the Stark Law. The final rule, which was effective October 1, 2009, imposes additional limitations on the ability of physicians to refer patients to medical facilities in which the physician or an immediate family member has an ownership interest for treatment. Among other things, the rule provides that leases of equipment between physician owners that may refer patients and hospitals must be on a fixed rate, rather than a per use basis. Prior to enactment of the final rule, physician owned entities had increasingly become involved in the acquisition of medical technologies, including the CyberKnife System. In many cases, these entities entered into arrangements with hospitals that billed Medicare for the furnishing of medical services, and the physician owners were among the physicians who referred patients to the entity for services. The rule limits these arrangements and could require the restructuring of existing arrangements between physicians owned entities and hospitals and could discourage physicians from participating in the acquisition and ownership of medical technologies. The final rule also prohibits percentage-based compensation in equipment leases. As a result of the finalization of these regulations, some existing CyberKnife System operators have modified or restructured their corporate or organizational structures. In addition, certain customers that planned to open CyberKnife centers in the United States involving physician ownership have restructured their legal ownership structure. Certain entities were not able to establish viable models for CyberKnife System operation and therefore canceled their CyberKnife System purchase agreements. Accordingly, 23 these regulations have resulted in cancellations of CyberKnife System purchase agreements and could also reduce the attractiveness of medical technology acquisitions, including CyberKnife System purchases, by physician-owned joint ventures or similar entities. As a result, these regulations have had, and could continue to have, an adverse impact on our product sales and therefore on our business and results of operations. A person who engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare or Medicaid programs in violations of the Stark Law is subject to civil monetary penalties of up to $15,000 per bill submission, an assessment of up to three times the amount claimed, and possible exclusion from federal healthcare programs such as Medicare and Medicaid. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state. Federal False Claims Act. The federal False Claims Act prohibits the knowing filing or causing the filing of a false claim or the knowing use of false statements to obtain payment from the federal government. When an entity is determined to have violated the False Claims Act, it may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Suits filed under the False Claims Act, known as ‘‘qui tam’’ actions, can be brought by any individual on behalf of the government and such individuals, sometimes known as ‘‘relators’’ or, more commonly, as ‘‘whistleblowers,’’ may share in any amounts paid by the entity to the government in fines or settlement. In addition, certain states have enacted laws modeled after the federal False Claims Act. Qui tam actions have increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a false claim action, pay fines or be excluded from Medicare, Medicaid or other federal or state healthcare programs as a result of an investigation arising out of such action. We have retained the services of a reimbursement consultant, for which we pay certain consulting fees, to provide us and facilities that have purchased a CyberKnife or TomoTherapy System, with general reimbursement advice. While we believe this will assist our customers in filing proper claims for reimbursement, and even though such consultants do not submit claims on behalf of our customers, the fact that we provide these consultant services could expose us to additional scrutiny and possible liability in the event one of our customers is investigated and determined to be in violation of any of these laws. HIPAA. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment. As a participant in the healthcare industry, we are also subject to extensive laws and regulations protecting the privacy and integrity of patient medical information, including privacy and security standards required under HIPAA. The HIPAA privacy standard was amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, enacted as part of the American Recovery and Reinvestment Act of 2009. HITECH significantly increases the civil money penalties for violations of patient privacy rights protected under HIPAA. Although we are not a covered entity under HIPAA, we have entered into agreements with certain covered entities under which we are considered to be a ‘‘business associate’’ under HIPAA. As a business associate, we are 24 required to implement policies, procedures and reasonable and appropriate security measures to protect individually identifiable health information we receive from covered entities. Furthermore, as of February 2010, business associates are now directly subject to regulations under HIPAA, including a new enforcement scheme, criminal and civil penalties for certain violations, and inspection requirements. Foreign Corrupt Practices Act. The United States and foreign government regulators have increased regulation, enforcement, inspections and governmental investigations of the medical device industry, including increased United States government oversight and enforcement of the Foreign Corrupt Practices Act. Whenever the United States or another foreign governmental authority concludes that we are not in compliance with applicable laws or regulations, such governmental authority can impose fines, delay or suspend regulatory clearances, institute proceedings to detain or seize our products, issue a recall, impose operating restrictions, enjoin future violations and assess civil penalties against us or our officers or employees, and can recommend criminal prosecution to the Department of Justice. Moreover, governmental authorities can ban or request the recall, repair, replacement or refund of the cost of any device or product we manufacture or distribute. We are also potentially subject to the UK Bribery Act, which could also lead to the imposition of civil and criminal fines. Any of the foregoing actions could result in decreased sales as a result of negative publicity and product liability claims, and could have a material adverse effect on our financial condition, results of operations and prospects. International Regulation International sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain clearance or approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may be different. The primary regulatory environment in Europe is that of the European Union and the three additional member states of the European Economic Area, or EEA, which have adopted similar laws and regulations with respect to medical devices. The European Union has adopted numerous directives and the European Committee for Standardization has promulgated standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of the relevant directive will be entitled to bear CE conformity marking, indicating that the device conforms with the essential requirements of the applicable directives and, accordingly, may be commercially distributed throughout the member states of the European Economic Area. The method of assessing conformity to applicable standards and directives depends on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a notified body, an independent and neutral institution appointed by a European Union member state to conduct the conformity assessment. This relevant assessment may consist of an audit of the manufacturer’s quality system (currently ISO 13485), provisions of the Medical Devices Directive, and specific testing of the manufacturer’s device. In September 2002 and February 2005, Accuray’s and TomoTherapy’s facilities, respectively, were awarded the ISO 13485 certification, which replaces the ISO 9001 and EN 46001 standards, which have been subsequently maintained through periodic assessments, in accordance with the expiration dates of the standards, and we are currently authorized to affix the CE mark to our products, allowing us to sell our products throughout the European Economic Area. We are also currently subject to regulations in Japan. Under the Pharmaceutical Affairs Law in Japan, a pre-market approval necessary to sell, market and import a product, or shonin, must be obtained from the Ministry of Health, Labor and Welfare, or MHLW, for our products. A Japanese distributor received 25 the first government approval to market the CyberKnife System from MHLW in November 1996. In December 2003, we received approval from the MHLW to market the CyberKnife System in Japan for clinical applications in the head and neck, and a new distributor, Chiyoda Technology Corporation, was appointed to distribute the CyberKnife System. In June 2008, we received approval from the MHLW to market the CyberKnife System for treatments throughout the body where radiation treatment is indicated. On June 30, 2009, our subsidiary, Accuray Japan KK, became the Marketing Authorization Holder in Japan, which allowed the Company to directly sell our products in Japan. In August 2010, we received Shonin approval from MHLW to market the CyberKnife G4 System to treat tumors non-invasively anywhere in the body, inclusive of head and neck. Hi-Art Co. Ltd., the original distributor for TomoTherapy in Japan, received the Shonin approval from the MHLW to market the TomoTherapy System for use as an integrated system for the planning and delivery of IMR for the treatment of cancer in January 2006. The Shonin was transferred to another distributor, Hitachi Medical Corporation in January 2009. During September 2011, Hitachi Medical Corporation received a Shonin approval for the marketing of the TomoHD model. In July 2012, we took over the Shonins and the service operations of the TomoTherapy Systems in Japan from Hitachi Medical Corporation. In March 2014, we received Shonin approval from MHLW for CyberKnife M6 Series. We are subject to additional regulations in other foreign countries, including, but not limited to, Canada, Taiwan, China, Korea, and Russia in order to sell our products. We intend that either we or our distributors will receive any necessary approvals or clearance prior to marketing our products in those international markets. State Certificate of Need Laws In some states, a certificate of need or similar regulatory approval is required prior to the acquisition of high-cost capital items or the provision of new services. These laws generally require appropriate state agency determination of public need and approval prior to the acquisition of such capital items or addition of new services. Certificate of need regulations may preclude our customers from acquiring one of our systems, and from performing stereotactic radiosurgery procedures using one of our systems. Several of our prospective customers currently are involved in appeals of certificate of need determinations. If these appeals are not resolved in favor of these prospective customers, they may be precluded from purchasing and/or performing services using one of our systems. Certificate of need laws are the subject of continuing legislative activity, and a significant increase in the number of states regulating the acquisition and use of one of our systems through certificate of need or similar programs could adversely affect us. Backlog For a discussion of the Company’s fiscal 2014 backlog, please refer to the section entitled ‘‘Backlog,’’ in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Employees As of June 30, 2014, we had 1,026 employees worldwide. None of the employees is represented by a labor union or is covered by a collective bargaining agreement. We have never experienced any employment related work stoppages and we believe our relationship with our employees is good. Geographic Information For financial reporting purposes, net sales and long-lived assets attributable to significant geographic areas are presented in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements, which is incorporated herein by reference. 26 Available Information Our main corporate website address is www.accuray.com. We make available on this web site, free of charge, copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and our proxy statements, and any amendments to those reports, as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission, the SEC. All SEC filings are also available at the SEC’s website at www.sec.gov. In addition, the Corporate Governance Guidelines and the charters of the Audit Committee, Compensation Committee, Nominating and Disclosure Committee of our Board of Directors are also available on the investor relations page of our website. The contents of our web site are not intended to be incorporated by reference into this report or in any other report or document we file or furnish, and any references to our web site are intended to be textual references only. We operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the other information contained in this Form 10-K, the following discussion highlights some of these risks and the possible impact of these factors on our business, financial condition and future results of operations. If any of the following risks actually occur, our business, financial condition or results of operations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks and uncertainties may impact the ‘‘forward-looking’’ statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in ‘‘forward-looking’’ statements. 27 Item 1A. RISK FACTORS Risks Related to Our Business If the CyberKnife or TomoTherapy Systems do not achieve widespread market acceptance, we will not be able to generate the revenue necessary to support our business. Achieving physician, patient, hospital administrator and third-party payor acceptance of the CyberKnife and TomoTherapy Systems as preferred methods of tumor treatment is crucial to our continued success. Physicians will not begin to use or increase the use of the CyberKnife or TomoTherapy Systems unless they determine, based on experience, clinical data and other factors, that the CyberKnife and TomoTherapy Systems are safe and effective alternatives to traditional treatment methods. We often need to educate physicians about the use of stereotactic radiosurgery, IGRT and adaptive radiation therapy, convince healthcare payors that the benefits of the CyberKnife and TomoTherapy Systems and their related treatment processes outweigh their costs and help train qualified physicians in the skilled use of these systems. In addition, we also must educate prospective customers regarding the entire functionality of our radiation therapy systems and their relative benefits compared to alternative products and treatment methods. We have expended and will continue to expend significant resources on marketing and educational efforts to create awareness of stereotactic radiosurgery and Robotic IMRT as well as adaptive radiation therapy and IGRT generally and to encourage the acceptance and adoption of our products for these technologies. We cannot be sure that our products will gain significant market acceptance among physicians, patients and healthcare payors, even if we spend significant time and expense on their education. In addition, the CyberKnife and TomoTherapy Systems are major capital purchases, and purchase decisions are greatly influenced by hospital administrators who are subject to increasing pressures to reduce costs. These and other factors, including the following, may affect the rate and level of market acceptance of each of the CyberKnife and TomoTherapy Systems: (cid:127) the CyberKnife and TomoTherapy Systems’ price relative to other products or competing treatments; (cid:127) our ability to develop new products and enhancements and receive regulatory clearances and approval, if required, to existing products in a timely manner; (cid:127) increased scrutiny by state boards when evaluating certificates of need requested by purchasing institutions; (cid:127) perception by patients, physicians and other members of the healthcare community of the CyberKnife and TomoTherapy Systems’ safety, efficacy, efficiency and benefits compared to competing technologies or treatments; (cid:127) willingness of physicians to adopt new techniques and the ability of physicians to acquire the skills necessary to operate the CyberKnife and TomoTherapy Systems; (cid:127) extent of third-party coverage and reimbursement rates, particularly from Medicare, for procedures using the CyberKnife and TomoTherapy Systems; and (cid:127) development of new products and technologies by our competitors or new treatment alternatives. If the CyberKnife or TomoTherapy Systems are unable to achieve or maintain market acceptance, new orders and sales of our systems would be adversely affected, our revenue levels would decrease and our business would be harmed. 28 We have a large accumulated deficit, may incur future losses and may be unable to achieve profitability. As of June 30, 2014, we had an accumulated deficit of $355 million. We may incur net losses in the future, particularly as we improve our selling and marketing activities. Our ability to achieve and sustain long-term profitability is largely dependent on our ability to successfully market and sell the CyberKnife and TomoTherapy Systems, control our costs, and effectively manage our growth. We cannot assure you that we will be able to achieve profitability. In the event we fail to achieve profitability, our stock price could decline. If we do not effectively manage our growth, our business may be significantly harmed. In order to implement our business strategy, we expect continued growth in our infrastructure requirements, particularly as we expand our manufacturing capacities and our sales and marketing capabilities. To manage our growth, we must expand our facilities, augment our management, operational and financial systems, hire and train additional qualified personnel, scale-up our manufacturing capacity and expand our marketing and distribution capabilities. Our manufacturing, assembly and installation process is complex and occurs over many months, and we must effectively scale this entire process to satisfy customer expectations and changes in demand. Further, to accommodate our growth and compete effectively, we will be required to improve our information systems. We cannot be certain that our personnel, systems, procedures and internal controls will be adequate to support our future operations. If we cannot manage our growth effectively, our business will suffer. Our ability to achieve profitability depends in part on maintaining or increasing our gross margins on product sales and service, which we may not be able to achieve. A number of factors may adversely impact our gross margins, including: (cid:127) lower than expected manufacturing yields of high cost components leading to increased manufacturing costs; (cid:127) low production volume which will result in high levels of overhead cost per unit of production; (cid:127) the timing of revenue recognition and revenue deferrals; (cid:127) increased material or labor costs; (cid:127) increased service or warranty costs or the failure to reduce service or warranty costs; (cid:127) increased price competition; (cid:127) variation in the margins across products installed in a particular period; and (cid:127) how well we execute on our strategic and operating plans. If we are unable to maintain or increase our gross margins on product sales and service, our results of operations could be adversely impacted, we may not achieve profitability and our stock price could decline. We have limited experience and capability in manufacturing. If we encounter manufacturing problems, or if our manufacturing facilities do not continue to meet federal, state or foreign manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations, which would result in delays and lost revenue. The CyberKnife and TomoTherapy Systems are complex, and require the integration of a number of components from several sources of supply. We must manufacture and assemble these complex systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. 29 We have a limited history of manufacturing commercial quantities of the CyberKnife and TomoTherapy Systems. In particular, we manufacture compact linacs as a component of the CyberKnife and TomoTherapy Systems. Our linac components are extremely complex devices and require significant expertise to manufacture, and as a result of our limited manufacturing experience we may have difficulty producing needed components in a commercially viable manner. We may encounter difficulties in scaling up production of the CyberKnife or TomoTherapy Systems, including problems with quality control and assurance, component supply shortages, increased costs, shortages of qualified personnel, the long lead time required to develop additional radiation-shielded facilities for purposes of testing our products and/or difficulties associated with compliance with local, state, federal and foreign regulatory requirements. If our manufacturing capacity does not keep pace with product demand, we will not be able to fulfill orders in a timely manner, which in turn may have a negative effect on our financial results and overall business. Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adversely affect our financial results. 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 experienced low manufacturing yields and initially delivered only a small number of units. Our initial life-cycle testing revealed that the units did not have the durability that we, and our customers, expect in our products. Currently, our internal testing of the MLC has been concluded to our satisfaction and we have begun our evaluation of the MLC in the field, with the goal of ensuring that we introduce a clinically effective and reliable collimator. 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. The occurrence of new manufacturing and supply issues related to the MLC for our CyberKnife System may adversely affect market acceptance of our CyberKnife M6 System and negatively impact our revenue and overall business. In 2014, we began transitioning production of our CyberKnife Systems, excluding certain linear accelerator production, from our manufacturing facilities in Sunnyvale, California, to our facilities in Madison, Wisconsin. While we have made significant progress, such transition efforts are on-going. The transition process could result in the disruption of existing business, require additional domestic and foreign permits and regulatory clearances, cause unforeseen expenses, and divert management attention, any of which could have an adverse effect on our business and results of operations. Our manufacturing processes and the manufacturing processes of our third-party suppliers are required to comply with the FDA’s Quality System Regulation, or QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, production process, controls, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality requirements. We are also subject to state licensing and other requirements and licenses applicable to manufacturers of medical devices, and we are required to comply with International Organization for Standardization, or ISO, quality system standards in order to produce products for sale in Europe, as well as various other foreign laws and regulations. Because our manufacturing processes include the production of diagnostic and therapeutic X-ray equipment and laser equipment, we are subject to the electronic product radiation control provisions of the Federal Food, Drug and Cosmetic Act, which requires that we file reports with the FDA, applicable states and our customers regarding the distribution, manufacturing and installation of these types of equipment. The FDA enforces the QSR and the electronic product radiation control provisions through periodic inspections, some of which may be unannounced. We have been, and anticipate in the future being subject to such inspections. FDA inspections usually occur every two to three years. During such inspections, the FDA may issue Inspectional Observations on Form FDA 483, listing instances where 30 the manufacturer has failed to comply with applicable regulations and procedures, or warning letters. Our Sunnyvale facility, where we manufacture the CyberKnife Systems, was most recently inspected by the FDA in June 2012. The 2012 inspection resulted in several observations. The initial classification of the inspection is considered to be Voluntary Action Indicated. We have undertaken corrective actions in response to the FDA’s observations. In addition, our Madison facility, where we manufacture the TomoTherapy System, was most recently inspected by the FDA in July 2012. The 2012 inspection resulted in no observations. If a manufacturer does not adequately address the observations, the FDA may take enforcement action against the manufacturer, including the imposition of fines, restriction of the ability to export product, total shutdown of production facilities and criminal prosecution. If we or a third-party supplier receive a Form FDA 483 with material or major observations that are not promptly corrected, fail to pass a QSR inspection, or fail to comply with these, ISO and other applicable regulatory requirements, our operations could be disrupted and our ability to generate sales could be delayed. Our failure to take prompt and satisfactory corrective action in response to an adverse inspection or our failure to comply with applicable standards could result in enforcement actions, including a public warning letter, a shutdown of our manufacturing operations, a recall of our products, civil or criminal penalties, or other sanctions, which would cause our sales and business to suffer. In addition, because some foreign regulatory approvals are based on approvals or clearances from the FDA, any failure to comply with FDA requirements may also disrupt our sales of products in other countries. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we or our third-party suppliers have in all instances fully complied with all applicable requirements. If any of these events occurs, our reputation could be harmed, we could lose customers and there could be a material adverse effect on our business, financial condition and results of operations. If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we could outsource needed production or enter into licensing or other third party arrangements, this could reduce our gross margin and expose us to the risks inherent in relying on others. We also cannot assure you that our suppliers will deliver an adequate supply of required components on a timely basis or that they will adequately comply with the QSR. Failure to obtain these components on a timely basis would disrupt our manufacturing processes and increase our costs, which would harm our operating results. Our industry is subject to intense competition and rapid technological change, which may result in products or new tumor treatments that are superior to the CyberKnife and TomoTherapy Systems. If we are unable to anticipate or keep pace with changes in the marketplace and the direction of technological innovation and customer demands, our products may become obsolete or less useful and our operating results will suffer. The medical device industry in general and the non-invasive cancer treatment field in particular are subject to intense and increasing competition and rapidly evolving technologies. Because our products often have long development and government approval cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. To compete successfully, we will need to continue to demonstrate the advantages of our products and technologies over well-established alternative procedures, products and technologies, and convince physicians and other healthcare decision makers of the advantages of our products and technologies. Traditional surgery and other forms of minimally invasive procedures, brachytherapy, chemotherapy or other drugs remain alternatives to the CyberKnife and TomoTherapy Systems. We consider the competition for the CyberKnife and TomoTherapy Systems to be existing radiation therapy systems, primarily using C-arm linacs, which are sold by large, well-capitalized companies with significantly greater market share and resources than we have. Several of these 31 competitors are also able to leverage their fixed sales, service and other costs over multiple products or product lines. In particular, we compete with a number of existing radiation therapy equipment companies, including Varian Medical Systems, Inc., Elekta AB , Mitsubishi Heavy Industries, Ltd., BrainLAB AG and ViewRay Incorporated. Varian has been the leader in the external beam radiation therapy market for many years and has the majority market share for radiation therapy systems worldwide. In general, because of aging demographics and attractive market factors in oncology, we believe that new competitors will enter the radiosurgery and radiation therapy markets in the years ahead. The CyberKnife System has not typically been used to perform traditional radiation therapy and therefore competition has been limited with conventional medical linacs that perform traditional radiation therapy. However, the CyberKnife VSI System, which we introduced in November of 2009, may be used to perform Robotic IMRT, an advanced method of traditional radiation therapy, which products of Elekta and Varian are also capable of performing. The new CyberKnife M6 Series, which we introduced in October 2012, includes the option of an MLC which may further the use of the CyberKnife Systems to perform radiation therapy, when this feature is commercially available. In October 2012, Varian announced a new line of C-arm gantries, called the Edge systems, which Varian claims are specifically designed for radiosurgery to compete with our CyberKnife Systems. In addition, some manufacturers of conventional linac based radiation therapy systems, including Varian and Elekta, have products that can be used in combination with body and/or head frames and image guidance systems to perform both radiosurgical and radiotherapy procedures. Furthermore, many government, academic and business entities are investing substantial resources in research and development of cancer treatments, including surgical approaches, radiation treatment, MRI-guided radiotherapy systems, proton therapy systems, drug treatment, gene therapy (which is the treatment of disease by replacing, manipulating, or supplementing nonfunctional genes), and other approaches. Successful developments that result in new approaches for the treatment of cancer could reduce the attractiveness of our products or render them obsolete. Our future success will depend in large part on our ability to establish and maintain a competitive position in current and future technologies. Rapid technological development may render the CyberKnife and TomoTherapy Systems and their technologies obsolete. Many of our competitors have or may have greater corporate, financial, operational, sales and marketing resources, and more experience and resources in research and development than we have. We cannot assure you that our competitors will not succeed in developing or marketing technologies or products that are more effective or commercially attractive than our products or that would render our technologies and products obsolete or less useful. We may not have the financial resources, technical expertise, marketing, distribution or support capabilities to compete successfully in the future. Our success will depend in large part on our ability to maintain a competitive position with our technologies. If we are unable to develop new products or enhance existing products, we may be unable to attract or retain customers. Our success depends on the successful development, regulatory clearance or approval, introduction and commercialization of new generations of products, treatment systems, and enhancements to and/or simplification of existing products. The CyberKnife and TomoTherapy Systems, which are currently our principal products, are technologically complex and must keep pace with, among other things, the products of our competitors. We are making significant investments in long-term growth initiatives. Such initiatives require significant capital commitments, involvement of senior management and other investments on our part, which we may be unable to recover. Our timeline for the development of new products or enhancements may not be achieved and price and profitability targets may not prove feasible. Commercialization of new products may prove challenging, and we may be required to invest more time and money than expected to successfully introduce them. Once introduced, new products may adversely impact orders and sales of our existing products, or make them less desirable or even 32 obsolete. Compliance with regulations, competitive alternatives, and shifting market preferences may also impact the successful implementation of new products or enhancements. Our ability to successfully develop and introduce new products, treatment systems and product enhancements and simplifications, and the revenues and costs associated with these efforts, will be affected by our ability to: (cid:127) properly identify customer needs; (cid:127) prove feasibility of new products in a timely manner; (cid:127) educate physicians about the use of new products and procedures; (cid:127) comply with internal quality assurance systems and processes timely and efficiently; (cid:127) limit the timing and cost of obtaining regulatory approvals or clearances; (cid:127) accurately predict and control costs associated with inventory overruns caused by phase-in of new products and phase-out of old products; (cid:127) price new products competitively; (cid:127) manufacture and deliver our products in sufficient volumes on time, and accurately predict and control costs associated with manufacturing, installation, warranty and maintenance of the products; (cid:127) meet our product development plan and launch timelines; (cid:127) improve manufacturing yields of components; and (cid:127) manage customer demands for retrofits of both old and new products. Even if customers accept new products or product enhancements, the revenues from these products may not be sufficient to offset the significant costs associated with making them available to customers. We cannot be sure that we will be able to successfully develop, obtain regulatory approval or clearance for, manufacture or introduce new products, treatment systems or enhancements, the roll-out of which involves compliance with complex quality assurance processes, including QSR. Failure to obtain regulatory approval or clearance for our products or to complete these processes in a timely and efficient manner could result in delays that could affect our ability to attract and retain customers, or could cause customers to delay or cancel orders, causing our backlog, revenues and operating results to suffer. We could become subject to product liability claims, product recalls, other field actions and warranty claims that could be expensive, divert management’s attention and harm our business. Our business exposes us to potential liability risks that are inherent in the manufacturing, marketing and sale of medical device products. We may be held liable if a CyberKnife or TomoTherapy System causes injury or death or is found otherwise unsuitable during usage. Our products incorporate sophisticated components and computer software. Complex software can contain errors, particularly when first introduced. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after installation. Because our products are designed to be used to perform complex surgical and therapeutic procedures involving delivery of radiation to the body, defects, even if small, could result in a number of complications, some of which could be serious and could harm or kill patients. Any alleged weaknesses in physician training and services associated with our products may result in unsatisfactory patient outcomes and product liability lawsuits. It is also possible that defects in the design, manufacture or labeling of our products might 33 necessitate a product recall or other field corrective action, which may result in warranty claims beyond our expectations and may harm our reputation and create adverse publicity. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs. We may also be subject to claims for property damage or economic loss related to, or resulting from, any errors or defects in our products, or the installation, servicing and support of our products, or any professional services rendered in conjunction with our products. The coverage limits of our insurance policies may not be adequate to cover future claims. If sales of our products increase or we suffer future product liability claims, we may be unable to maintain product liability insurance in the future at satisfactory rates or with adequate amounts of coverage. A product liability claim, any product recalls or other field actions or excessive warranty claims, whether arising from defects in design or manufacture or labeling, could negatively affect our sales or require a change in the design, manufacturing process or the indications for which the CyberKnife or TomoTherapy Systems may be used, any of which could harm our reputation and business and result in a decline in revenue. In addition, if a product we designed or manufactured is defective, whether due to design or manufacturing, or labeling defects, improper use of the product or other reasons, we may be required to notify regulatory authorities and/or to recall the product, possibly at our expense. We have voluntarily conducted recalls and product corrections in the past, including one recall for the CyberKnife System in fiscal year 2014. Accuray initiated each of these recalls. While no serious adverse health consequences have been reported in connection with these recalls and the costs associated with each such recall were not material, we cannot ensure that the FDA will not require that we take additional actions to address problems that resulted in previous recalls. A required notification of a correction or removal to a regulatory authority or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other civil or criminal penalties. The adverse publicity resulting from any of these actions could cause customers to review and potentially terminate their relationships with us. These investigations, corrections or recalls, especially if accompanied by unfavorable publicity, patient injury or termination of customer contracts, could result in incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business. Our reliance on single-source suppliers for critical components of the CyberKnife and TomoTherapy Systems could harm our ability to meet demand for our products in a timely and cost effective manner. We currently depend on single-source suppliers for some of the critical components necessary for the assembly of the CyberKnife and TomoTherapy Systems, including, with respect to the CyberKnife System, the robot and imaging detectors, and, with respect to the TomoTherapy Systems, the ring gantry, the solid state modulator, the radiation detector and the magnetron. If any single-source supplier was to cease delivering components to us or fail to provide the components to our specifications and on a timely basis, we might be required to find alternative sources for these components. In some cases, alternative suppliers may be located in the same geographic area as existing suppliers, and are thus subject to the same economic, political, and geographic factors that may affect existing suppliers to meet our demand. We may have difficulty or be unable to find alternative sources for these components. As a result, we may be unable to meet the demand for the CyberKnife or TomoTherapy Systems, which could harm our ability to generate revenue and damage our reputation. Even if we do find alternate suppliers, we will be required to qualify any such alternate suppliers and we would likely experience a lengthy delay in our manufacturing processes or a cessation in production, which would result in delays of shipment to end users. We cannot assure you that our single-source suppliers will be able or willing to meet our future demands. We generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single-source supplier fails to deliver components on a timely basis. Furthermore, if we are required to change the manufacturer of a critical component of the CyberKnife or TomoTherapy 34 Systems, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements and guidelines, which could further impede our ability to manufacture our products in a timely manner. If the change in manufacturer results in a significant change to the product, a new 510(k) clearance would be necessary, which would likely cause substantial delays. The disruption or termination of the supply of key components for the CyberKnife or TomoTherapy Systems could harm our ability to manufacture our products in a timely manner or within budget, harm our ability to generate revenue, lead to customer dissatisfaction and adversely affect our reputation and results of operations. We depend on key employees, the loss of whom would adversely affect our business. If we fail to attract and retain employees with the expertise required for our business, we may be unable to continue to grow our business. We are highly dependent on the members of our senior management, sales, marketing, operations and research and development staff. Our future success will depend in part on our ability to retain our key employees and to identify, hire and retain additional personnel. Competition for qualified personnel in the medical device industry is intense, and finding and retaining qualified personnel with experience in our industry is very difficult. We believe there are only a limited number of individuals with the requisite skills to serve in many of our key positions and we compete for key personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research institutions. A significant portion of our compensation to our key employees is in the form of stock related grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additional qualified personnel. We do not maintain, and do not currently intend to obtain, key employee life insurance on any of our personnel. If we fail to hire and retain personnel in key positions, we may be unable to continue to grow our business successfully. Disruption of critical information systems could harm our business and financial condition. Information technology helps us operate more efficiently, interface with customers, maintain financial accuracy and efficiency, and accurately produce our financial statements. If we do not allocate and effectively manage the resources necessary to build, sustain and secure the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through a security breach. In addition, we have moved some of our data and information to a cloud computing system, where applications and data are hosted, accessed and processed through a third-party provider over a broadband Internet connection. In a cloud computing environment, we could be subject to outages and security breaches by the third party service provider. If our data management systems do not effectively collect, store, process and report relevant data for the operation of our business, whether due to equipment malfunction or constraints, software deficiencies, computer viruses, security breaches, catastrophic events or human error, our ability to effectively plan, forecast and execute our business plan and comply with applicable laws and regulations will be impaired, perhaps materially. Any such impairment could materially and adversely affect our financial condition, results of operations, cash flows and the timeliness with which we internally and externally report our operating results. Likewise, data privacy breaches by employees and others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized person or to the public. There can be no assurance that any efforts we make to prevent against such privacy breaches will prevent breakdowns or breaches in our systems that could adversely affect our business. Moreover, we manufacture and sell products that allow our customers to store confidential information about their patients. While we have implemented security measures to protect our products from unauthorized access, these measures do not secure our customers’ equipment or any information stored in our customers’ systems or at their locations. A breach of network security and systems or other events that 35 cause the loss or public disclosure of, or access by third parties to, sensitive information stored by us or our customers could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our customers to use our solutions, harm to our reputation and brand, and time-consuming and expensive litigation, any of which could have an adverse effect on our financial results. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our business and our stock price. Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal or unauthorized transactions. If we cannot maintain effective controls and provide reliable financial reports, our business and operating results could be harmed. A failure to implement and maintain effective internal control over financial reporting could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our business and operating results and our stock price, and we could be subject to stockholder litigation. We may have difficulties in determining the effectiveness of our internal controls due to our complex financial model. The complexity of our financial model contributes to our need for effective financial reporting systems and internal controls. We recognize revenue from a range of transactions including CyberKnife and TomoTherapy Systems sales and services. The CyberKnife and TomoTherapy Systems are complex products that contain both hardware and software elements. The complexity of the CyberKnife and TomoTherapy Systems and of our financial model pertaining to revenue recognition requires us to process a broader range of financial transactions than would be required by a company with a less complex financial model. Accordingly, deficiencies or weaknesses in our internal controls would likely impact us more significantly than they would impact a company with a less complex financial model. If we were to find that our internal controls were deficient, and/or we would be required to amend or restate historical financial statements, this would likely have a negative impact on our stock price. If third-party payors do not provide sufficient coverage and reimbursement to healthcare providers for use of the CyberKnife and TomoTherapy Systems, demand for our products and our revenue could be adversely affected. Our customers rely significantly on reimbursement for CyberKnife and TomoTherapy procedures. Our ability to commercialize our products successfully will depend in significant part on the extent to which public and private third party payors provide adequate coverage and reimbursement for procedures that are performed with our products. Third-party payors, and in particular managed care organizations, challenge the prices charged for medical products and services and institute cost containment measures to control or significantly influence the purchase of medical products and services. If reimbursement policies or other cost containment measures are instituted in a manner that significantly reduces the coverage or payment for the procedures that are performed with our products, our existing customers may not continue using our products or may decrease their use of our products, and we may have difficulty obtaining new customers. Such actions would likely have a material adverse effect on our operating results. In November 2013, the centers for Medicare and Medicaid Services, or CMS, issued the 2014 Medicare payment rates for hospital outpatient services, for physicians, and services performed in the freestanding center setting for calendar year 2014. When compared to the prior year, the 2014 36 reimbursement rates are modestly higher or flat for conventional radiotherapy (IMRT and 3D conformal). For radiosurgery, some reimbursement rates significantly increased and others moderately decreased when compared to the prior year. Such decreases could have a negative impact on the continued use of our products by existing customers and our ability to obtain new customers. CMS reviews such rates annually, and could implement more significant changes in future years, which could discourage existing and potential customers from purchasing or using our products. The safety and efficacy of our products for certain uses is not yet supported by long-term clinical data, and our products may therefore prove to be less safe and effective than initially thought. Although we believe that the CyberKnife and TomoTherapy Systems have advantages over competing products and technologies, we do not have sufficient clinical data demonstrating these advantages for all tumor indications. In addition, we have only limited five-year patient survival rate data, which is a common long-term measure of clinical effectiveness in cancer treatment. We also have limited clinical data directly comparing the effectiveness of the CyberKnife Systems to other competing systems. Future patient studies or clinical experience may indicate that treatment with the CyberKnife System does not improve patient survival or outcomes. Likewise, because the TomoTherapy Systems have only been on the market since 2003, we have limited complication or patient survival rate data with respect to treatment using the system. In addition, while the effectiveness of radiation therapy is well understood, there is a growing but still limited number of peer-reviewed medical journal publications regarding the efficacy of highly conformal treatment such as that delivered by the TomoTherapy System. If future patient studies or clinical experience do not support our beliefs that the TomoTherapy System offers a more advantageous treatment for a wide variety of cancer types, use of the system could fail to increase or could decrease, and our business would therefore be adversely affected. Such results could reduce the rate of reimbursement by both public and private third-party payors for procedures that are performed with our products, slow the adoption of our products by physicians, significantly reduce our ability to achieve expected revenues and could prevent us from becoming profitable. In addition, if future results and experience indicate that our products cause unexpected or serious complications or other unforeseen negative effects, the FDA could rescind our clearances, our reputation with physicians, patients and others may suffer and we could be subject to significant legal liability. We rely on third parties to perform spare parts shipping and other logistics functions on our behalf. A failure or disruption at our logistics providers would adversely impact our business. Customer service is a critical element of our sales strategy. Third-party logistics providers store most of our spare parts inventory in depots around the world and perform a significant portion of our spare parts logistics and shipping activities. If any of our logistics providers suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, or we have to change and qualify alternative logistics providers for our spare parts, shipments of spare parts to our customers may be delayed and our reputation, business, financial condition and results of operations may be adversely affected. Third parties may claim we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling our product. The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. In particular, the field of radiation treatment of cancer is well established and crowded with the intellectual property of competitors and others. We also expect that other participants will enter the field. A number of companies in our market, as well as universities and research institutions, have issued patents and have filed patent applications which relate to the use of radiation therapy and stereotactic radiosurgery to treat cancerous and benign tumors. 37 Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of patent litigation actions is often uncertain. We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third party patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, our competitors or other third parties may assert that our products and the methods we employ in the use of our products are covered by United States or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware, and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for less invasive cancer treatment alternatives grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. Regardless of the merit of infringement claims, they can be time-consuming, result in costly litigation and diversion of technical and management personnel. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise funds, if necessary, to continue our operations. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the relevant patents or other intellectual property were upheld as valid and enforceable and we were found to infringe or violate the terms of a license to which we are a party, we could be prevented from selling our products unless we could obtain a license or were able to redesign the product to avoid infringement. Required licenses may not be made available to us on acceptable terms or at all. If we were unable to obtain a license or successfully redesign our system, we might be prevented from selling our system. If there is an allegation or determination that we have infringed the intellectual property rights of a competitor or other person, we may be required to pay damages, pay ongoing royalties or otherwise settle such matter upon terms that are unfavorable to us. In these circumstances, we may be unable to sell our products at competitive prices or at all, and our business and operating results could be harmed. We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. As is common in the medical device industry, we employ individuals who were previously employed at other medical equipment or biotechnology companies, including our competitors or potential competitors. We may be subject to claims that we or those employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against claims of this nature, litigation could result in substantial costs and be a distraction to management. It is difficult and costly to protect our intellectual property and our proprietary technologies, and we may not be able to ensure their protection. Our success depends significantly on our ability to obtain, maintain and protect our proprietary rights to the technologies used in our products. Patents and other proprietary rights provide uncertain protections, and we may be unable to protect our intellectual property. For example, we may be 38 unsuccessful in defending our patents and other proprietary rights against third party challenges. As key patents expire, our ability to prevent competitors from copying our technology may be limited. In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical security measures to protect our intellectual property rights. These measures may not be adequate to safeguard the technology underlying our products. If these measures do not protect our rights adequately, third parties could use our technology, and our ability to compete in the market would be reduced. Although we have attempted to obtain patent coverage for our technology where available and appropriate, there are aspects of the technology for which patent coverage was never sought or never received. There are also countries in which we sell or intend to sell the CyberKnife or TomoTherapy Systems but have no patents or pending patent applications. Our ability to prevent others from making or selling duplicate or similar technologies will be impaired in those countries in which we have no patent protection. Although we have several issued patents in the United States and in foreign countries protecting aspects of the CyberKnife and TomoTherapy Systems, our pending United States and foreign patent applications may not issue, may issue only with limited coverage or may issue and be subsequently successfully challenged by others and held invalid or unenforceable. Similarly, our issued patents and those of our licensors may not provide us with any competitive advantages. Competitors may be able to design around our patents or develop products which provide outcomes comparable or superior to ours. Our patents may be held invalid or unenforceable as a result of legal challenges by third parties, and others may challenge the inventorship or ownership of our patents and pending patent applications. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. In the event a competitor infringes upon our patent or other intellectual property rights, enforcing those rights may be difficult and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against challenge could be expensive and time consuming and could divert our management’s attention from our core business. We may not have sufficient resources to enforce our intellectual property rights or to defend our patents against a challenge. In addition, we may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially valuable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We also license patent and other proprietary rights to aspects of our technology to third parties in fields where we currently do not operate as well as in fields where we currently do operate. Disputes with our licensees may arise regarding the scope and content of these licenses. Further, our ability to expand into additional fields with our technologies may be restricted by our existing licenses or licenses we may grant to third parties in the future. The policies we have in place to protect our trade secrets may not be effective in preventing misappropriation of our trade secrets by others. In addition, confidentiality agreements executed by our employees, consultants and advisors may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. Litigating a trade secret claim is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge methods and know-how. If we are unable to protect our intellectual property rights, we may be unable to prevent competitors from using our own inventions and intellectual property to compete against us, and our business may be harmed. 39 Unfavorable results of legal proceedings could materially and adversely affect our financial condition. We are and may become a party to legal proceedings, claims and other legal matters in the ordinary course of business or otherwise. These legal proceedings, claims and other legal matters, regardless of merit, may be costly, time-consuming and require the attention of key management and other personnel. The outcomes of such matters are uncertain and difficult to predict. If any such matters are adjudicated against us, in whole or in part, we may be subject to substantial monetary damages, disgorgement of profits, and injunctions that prevent us from operating our business, any of which could materially and adversely affect our business and financial condition. We cannot guarantee that our insurance coverage will be sufficient to cover any damages awarded against us. If we are not able to meet the requirements of our license agreement with the Wisconsin Alumni Research Foundation, or WARF, we could lose access to the technologies licensed thereunder and be unable to manufacture, market or sell the TomoTherapy Systems. We license patents from WARF covering the multi-leaf collimator and other key technologies incorporated into the TomoTherapy Systems under a license agreement that requires us to pay royalties to WARF. In addition, the license agreement obligates us to pursue an agreed development plan and to submit periodic reports, and restricts our ability to take actions to defend the licensed patents. WARF has the right to unilaterally terminate the agreement if we do not meet certain minimum royalty obligations or satisfy other obligations related to our utilization of the technology. If WARF were to terminate the agreement or if we were to otherwise lose the ability to exploit the licensed patents, our competitive advantage would be reduced and we may not be able to find a source to replace the licensed technology. The license agreement reserves to WARF the initial right to defend or prosecute any claim arising with respect to the licensed technology. If WARF does not vigorously defend the patents, we may be required to engage in expensive patent litigation to enforce our rights, and any competitive advantage we have based on the licensed technology may be hampered. Any of these events could adversely affect our business, financial condition and results of operations. International sales of our products account for a significant portion of our revenue, which exposes us to risks inherent in international operations. Our international sales, as a percentage of total revenue, have increased over the last five fiscal years. The percentage of our revenue derived from sales outside of the Americas region was 58% in 2014, 55% in 2013 and 54% in 2012. To accommodate our international sales, we have invested significant financial and management resources to develop an international infrastructure that will meet the needs of our customers. We anticipate that a significant portion of our revenue will continue to be derived from sales of our products in foreign markets and that the percentage of our overall revenue that is derived from these markets may continue to increase. This revenue and related operations will therefore continue to be subject to the risks associated with international operations, including: (cid:127) economic or political instability in foreign countries; (cid:127) import delays; (cid:127) changes in foreign regulatory laws governing, among other matters, the clearance, approval and sales of medical devices; (cid:127) the potential failure to comply with foreign regulatory requirements to sell and market our products; (cid:127) longer payment cycles associated with many customers outside the United States; (cid:127) adequate coverage and reimbursement for the CyberKnife and TomoTherapy treatment procedures outside the United States; 40 (cid:127) failure of local laws to provide the same degree of protection against infringement of our intellectual property; (cid:127) protectionist laws and business practices that favor local competitors; (cid:127) the possibility that foreign countries may impose additional taxes, tariffs or other restrictions on foreign trade; (cid:127) risks relating to foreign currency, including fluctuations in foreign currency exchange rates; and (cid:127) contractual provisions governed by foreign laws and various trade restrictions, including U.S. prohibitions and restrictions on exports of certain products and technologies to certain nations. Our inability to overcome these obstacles could harm our business, financial condition and operating results. Even if we are successful in managing these obstacles, our partners internationally are subject to these same risks and may not be able to manage these obstacles effectively. In addition, future imposition of, or significant increases in, the level of customs duties, export quotas, regulatory restrictions or trade restrictions could materially harm our business. We face risks related to the current global economic environment, which could delay or prevent our customers from obtaining financing to purchase the CyberKnife and TomoTherapy Systems and implement the required facilities, which would adversely affect our business, financial condition and results of operations. The state of the global economy continues to be uncertain. The current global economic conditions and uncertain credit markets and concerns regarding the availability of credit pose a risk that could impact consumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. If the current situation continues to deteriorate or does not improve, our business could be negatively affected, including by reduced demand for our products resulting from a slow-down in the general economy, supplier or customer disruptions and/or temporary interruptions in our ability to conduct day-to-day transactions through our financial intermediaries involving the payment to or collection of funds from our customers, vendors and suppliers. For example, in the United States, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for their purchases of the CyberKnife or TomoTherapy Systems. In addition, some of our customers have been delayed in obtaining, or have not been able to obtain, necessary financing for the construction or renovation of facilities to house CyberKnife or TomoTherapy Systems, the cost of which can be substantial. These delays have in some instances led to our customers postponing the shipment and installation of previously ordered systems or cancelling their system orders, and may cause other customers to postpone their system installation or to cancel their agreements with us. An increase in delays and order cancellations of this nature would adversely affect our product sales, backlog and revenues, and therefore harm our business and results of operations. Because the majority of our product revenue is derived from sales of the CyberKnife and TomoTherapy Systems, and because we experience a long and variable sales and installation cycle, our quarterly results may be inconsistent from period to period. Our primary products are the CyberKnife and TomoTherapy Systems. We expect to generate substantially all of our revenue for the foreseeable future from sales of and service contracts for the CyberKnife and TomoTherapy Systems. The CyberKnife and TomoTherapy Systems have lengthy sales and purchase order cycles because they are major capital equipment items and require the approval of senior management at purchasing institutions. Selling our systems, from first contact with a potential customer to a complete order, generally spans six months to two years and involves personnel with 41 multiple skills. The sales process in the United States typically begins with pre-selling activity followed by sales presentations and other sales related activities. After the customer has expressed an intention to purchase a CyberKnife or TomoTherapy System, we negotiate and enter into a definitive purchase contract with the customer. The negotiation of terms that are not standard for Accuray may require additional time and approvals. Typically, following the execution of the contract, the customer begins the building or renovation of a radiation-shielded facility to house the CyberKnife or TomoTherapy System, which together with the subsequent installation of the CyberKnife or TomoTherapy System, can take up to 24 months to complete. In order to construct this facility, the customer must typically obtain radiation device installation permits, which are granted by state and local government bodies, each of which may have different criteria for permit issuance. If a permit was denied for installation at a specific hospital or treatment center, our CyberKnife or TomoTherapy System could not be installed at that location. In addition, some of our customers are cancer centers or facilities that are new, and in these cases it may be necessary for the entire facility to be completed before the CyberKnife or TomoTherapy System can be installed, which can result in additional construction and installation delays. Our sales and installations of CyberKnife and TomoTherapy Systems tend to be heaviest during the third month of each fiscal quarter. Under our revenue recognition policy, we generally do not recognize revenue attributable to a CyberKnife or TomoTherapy System purchase until after installation has occurred, if we are responsible for providing installation, or delivery. For international sales through distributors, we typically recognize revenue when the system is shipped and we have evidence of a purchase commitment from the end user. Under our current forms of purchase and service contracts, we record a majority of the purchase price as revenue for a CyberKnife or TomoTherapy System upon installation or delivery of the system. Events beyond our control may delay installation and the satisfaction of contingencies required to receive cash inflows and recognize revenue, including delays in the customer obtaining funding or financing, delays in construction at the customer site or delays in the customer obtaining receipt of regulatory approvals such as certificates of need. The long sales cycle, together with delays in the shipment and installation of CyberKnife and TomoTherapy Systems or customer cancellations, could adversely affect our cash flows and revenue, which would harm our results of operations and may result in significant fluctuations in our reporting of quarterly revenues. Because of these fluctuations, it is likely that in some future quarters, our operating results will fall below the expectations of securities analysts or investors. If that happens, the market price of our stock would likely decrease. These fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance. We depend on third-party distributors to market and distribute our products in international markets. If our distributors fail to successfully market and distribute our products, our business will be materially harmed. We depend on a number of distributors in our international markets. We cannot control the efforts and resources our third-party distributors will devote to marketing the CyberKnife or TomoTherapy Systems. Our distributors may not be able to successfully market and sell the CyberKnife or TomoTherapy Systems, may not devote sufficient time and resources to support the marketing and selling efforts and may not market the CyberKnife or TomoTherapy Systems at prices that will permit the product to develop, achieve or sustain market acceptance. In some jurisdictions, we rely on our distributors to manage the regulatory process, and we are dependent on their ability to do so effectively. In addition, if a distributor is terminated by us or goes out of business, it may take us a period of time to locate an alternative distributor, to seek appropriate regulatory approvals and to train its personnel to market the CyberKnife or TomoTherapy Systems, and our ability to sell and service the CyberKnife or TomoTherapy Systems in the region formerly serviced by such terminated distributor could be materially and adversely affected. Any of these factors could materially and adversely affect our revenue from international markets, increase our costs in those markets or damage our reputation. 42 If we are unable to attract additional international distributors, our international revenue may not grow. If our distributors experience difficulties, do not actively market the CyberKnife or TomoTherapy Systems or do not otherwise perform under our distribution agreements, our potential for revenue and gross margins from international markets may be dramatically reduced, and our business could be harmed. The high unit price of the CyberKnife and TomoTherapy Systems, as well as other factors, may contribute to substantial fluctuations in our operating results, which could adversely affect our stock price. Because of the high unit price of the CyberKnife and TomoTherapy Systems and the relatively small number of units installed each quarter, each installation of a CyberKnife or TomoTherapy System can represent a significant percentage of our revenue for a particular quarter. Therefore, if we do not install a CyberKnife or TomoTherapy System when anticipated, our operating results will vary significantly from our expectations. This is of particular concern in the current volatile economic environment, where we have had experiences with customers cancelling or postponing orders for our CyberKnife and TomoTherapy Systems and delaying any required build-outs. These fluctuations and other potential fluctuations mean that you should not rely upon our operating results in any particular period as an indication of future performance. In particular, in addition to the other risk factors described above and below, factors which may contribute to these fluctuations include: (cid:127) timing of when we are able to recognize revenue associated with sales of the CyberKnife and TomoTherapy Systems, which varies depending upon the terms of the applicable sales and service contracts; (cid:127) the proportion of revenue attributable to our legacy service plans; (cid:127) timing and level of expenditures associated with new product development activities; (cid:127) regulatory requirements in some states for a certificate of need prior to the installation of a radiation device; (cid:127) delays in shipment due, for example, to unanticipated construction delays at customer locations where our products are to be installed, cancellations by customers, natural disasters or labor disturbances; (cid:127) delays in our manufacturing processes or unexpected manufacturing difficulties; (cid:127) timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors; (cid:127) timing and level of expenditures associated with expansion of sales and marketing activities such as trade shows and our overall operations; and (cid:127) fluctuations in our gross margins and the factors that contribute to such fluctuations, as described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. These factors are difficult to forecast and may contribute to substantial fluctuations in our quarterly revenues and substantial variation from our projections, particularly during the periods in which our sales volume is low. These fluctuations may cause volatility in our stock price. As a strategy to assist our sales efforts, we may offer extended payment terms, which may potentially result in higher Days Sales Outstanding and greater payment defaults. We offer longer or extended payment terms for qualified customers in some circumstances. As of June 30, 2014, customer contracts with extended payment terms of more than one year amounted to less than 5% of our accounts receivable balance. While we qualify customers to whom we offer longer 43 or extended payment terms, their financial positions may change adversely over the longer time period given for payment. This may result in an increase in payment defaults, which would affect our revenue, as we recognize revenue on such transactions on a cash basis. Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control, which would adversely affect our business. We have facilities in countries around the world, including three manufacturing facilities, each of which is equipped to manufacture unique components of our products. The manufacturing facilities are located in Sunnyvale, California, Madison, Wisconsin and Chengdu, China. We do not maintain backup manufacturing facilities for all of our manufacturing facilities or for our IT facilities, so we depend on each of our current facilities for the continued operation of our business. In addition, we conduct a significant portion of other activities, including administration and data processing, at facilities located in the State of California which has experienced major earthquakes in the past, as well as other natural disasters. Chengdu, China, where one of our manufacturing facilities is located, has also experienced major earthquakes in the past. We do not carry earthquake insurance. Unexpected events at any of our facilities, including fires or explosions; natural disasters, such as hurricanes, floods, tornados and earthquakes; war or terrorist activities; unplanned outages; supply disruptions; and failures of equipment or systems, or the failure to take adequate steps to mitigate the likelihood or potential impact of such events, could significantly disrupt our operations, delay or prevent product manufacture and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, result in large expenses to repair or replace the facilities, and adversely affect our results of operation. We may attempt to acquire new businesses, products or technologies, or enter into strategic collaborations or alliances, and if we are unable to successfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expected benefits or harm our existing business. Our success will depend, in part, on our ability to expand our product offerings and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, products or technologies, or through collaborating with complementary businesses, rather than through internal development. The identification of suitable acquisition or alliance candidates can be difficult, time consuming and costly, and we may not be able to successfully complete identified acquisitions or alliances. Other companies may compete with us for these strategic opportunities. In addition, even if we successfully complete an acquisition or alliance, we may not be able to successfully integrate newly acquired organizations, products or technologies into our operations, and the process of integration could be expensive, time consuming and may strain our resources, and we may not realize the expected benefits of any acquisition, collaboration or strategic alliance. Furthermore, the products and technologies that we acquire or with respect to which we collaborate may not be successful, or may require significantly greater resources and investments than we originally anticipated. In addition, we may be unable to retain employees of acquired companies, or retain the acquired company’s customers, suppliers, distributors or other partners who are our competitors or who have close relationships with our competitors. Consequently, we may not achieve anticipated benefits of the acquisitions or alliances which could harm our existing business. In addition, future acquisitions or alliances could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges such as in-process research and development, any of which could harm our business and affect our financial results or cause a reduction in the price of our common stock. 44 Multiple factors may adversely affect our ability to fully utilize certain tax loss carryforwards. As of June 30, 2014, we had approximately $320.5 million and $166.8 million in federal and state net operating loss carry forwards, respectively, which expire in varying amounts beginning in 2019 for federal and 2015 for state purposes. In addition, as of June 30, 2014, we had federal and state research and development tax credit carryforwards of approximately $16.1 million and $15.7 million, respectively. The federal research credits will begin to expire in 2019, the California research credits have no expiration date, and the other state research credits will begin to expire in 2015. Utilization of our net operating loss and credit carry forwards is subject to annual limitation due to the application of the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions to us. However, none of the federal and state net operating loss carryforwards are expected to expire as a result of the ownership change limitation. Our results may be impacted by changes in foreign currency exchange rates. Currently, the majority of our international sales are denominated in U.S. dollars. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our sales price or make our products less competitive in international markets. Also, if our international sales increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which would expose us to foreign currency risks, including changes in currency exchange rates. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business would be materially harmed. Changes in interpretation or application of generally accepted accounting principles may adversely affect our operating results. We prepare our financial statements to conform with United States Generally Accepted Accounting Principles. These principles are subject to interpretation by the Financial Accounting Standards Board, American Institute of Certified Public Accountants, the Public Company Accounting Oversight Board, the Securities and Exchange Commission and various other regulatory or accounting bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. Additionally, as we are required to adopt new accounting standards, our methods of accounting for certain items may change, which could cause our results of operations to fluctuate from period to period. For example, due to the significance of the software component in certain of our products, we are currently bound by the software revenue recognition rules for a portion of our business. Our liquidity could be adversely impacted by adverse conditions in the financial markets. At June 30, 2014, we had $92.3 million in cash and cash equivalents and $79.6 million in investments. The available cash and cash equivalents are held in accounts managed by third party financial institutions and consist of cash in our operating accounts and cash invested in money market funds. The investments are managed by third party financial institutions and consist of U.S. corporate debt securities. To date, we have experienced no realized losses on or lack of access to our invested cash, cash equivalents or investments; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. At any point in time, we also have funds in our operating accounts that are with third party financial institutions that exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or 45 become subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts. Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy. While we believe that our existing cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs for at least the next twelve months, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including the other risk factors described above and below. If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain other debt financing, which could be difficult or impossible in the current economic and capital markets environments. Our debt levels may impair our ability to obtain additional financing in the future. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. We cannot assure that additional financing, if required, will be available in amounts or on terms acceptable to us, if at all. Risks Related to the Regulation of our Products and Business Modifications, upgrades and future products related to the CyberKnife or TomoTherapy Systems or new indications may require new FDA 510(k) clearances or premarket approvals, and such modifications, or any defects in design, manufacture or labeling may require us to recall or cease marketing the CyberKnife or TomoTherapy Systems until approvals or clearances are obtained. The CyberKnife and TomoTherapy Systems are medical devices that are subject to extensive regulation in the United States by local, state and the federal government, including by the FDA. The FDA regulates virtually all aspects of a medical device’s design, development, testing manufacturing, labeling, storage, record keeping, adverse event reporting, sale, promotion, distribution and shipping. Before a new medical device, or a new intended use or indication of or claim for an existing product, can be marketed in the United States, it must first receive either premarket approval or 510(k) clearance from the FDA, unless an exemption exists. Either process can be expensive, lengthy and unpredictable. The FDA’s 510(k) clearance process generally takes from three to twelve months, but it can last longer. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process and it generally takes from one to three years, or even longer, from the time the application is filed with the FDA. Despite the time, effort and cost, there can be no assurance that a particular device or a modification of a device will be approved or cleared by the FDA in a timely fashion, if at all. Even if we are granted regulatory clearances or approvals, they may include significant limitations on the indicated uses of the product, which may limit the market for those products, and how those products can be promoted. Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA also may change its policies, adopt additional regulations, or revise existing regulations, each of which could prevent or delay premarket approval or 510(k) clearance of our device, or could impact our ability to market our currently cleared device. We are also subject to medical device reporting regulations which require us to report to the FDA if our products cause or contribute to a death or a serious injury, or malfunction in a way that would likely cause or contribute to a death or a serious injury. We also are subject to Quality System regulations. Our products are also subject to state regulations and various worldwide laws and regulations. A component of our strategy is to continue to upgrade the CyberKnife and TomoTherapy Systems. Upgrades previously released by us required 510(k) clearance before we were able to offer them for sale. We expect our future upgrades will similarly require 510(k) clearance; however, future upgrades may be subject to the substantially more time consuming data generation requirements and uncertain 46 premarket approval or clearance process. If we were required to use the premarket approval process for future products or product modifications, it could delay or prevent release of the proposed products or modifications, which could harm our business. The FDA requires device manufacturers to make their own determination of whether or not a modification requires an approval or clearance; however, the FDA can review a manufacturer’s decision not to submit for additional approvals or clearances. Any modification to an FDA approved or cleared device that would significantly affect its safety or efficacy or that would constitute a major change in its intended use would require a new premarket approval or 510(k) clearance. The FDA has recently issued a draft guidance that, if finalized, will result in manufacturers needing to seek a significant number of new or additional clearances for changes made to legally marketed devices. We cannot assure you that the FDA will agree with our decisions not to seek approvals or clearances for particular device modifications or that we will be successful in obtaining premarket approvals or 510(k) clearances for modifications in a timely fashion, if at all. We have obtained 510(k) clearance for the CyberKnife Systems for the treatment of tumors anywhere in the body where radiation is indicated, and we have obtained 510(k) clearance for the TomoTherapy Systems to be used as integrated systems for the planning and delivery of IMRT for the treatment of cancer. We have made modifications to the CyberKnife and TomoTherapy Systems in the past and may make additional modifications in the future that we believe do not or will not require additional approvals or clearances. If the FDA disagrees, based on new finalized guidance and requires us to obtain additional premarket approvals or 510(k) clearances for any modifications to the CyberKnife or TomoTherapy Systems and we fail to obtain such approvals or clearances or fail to secure approvals or clearances in a timely manner, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA approval or clearance and we may be subject to significant regulatory fines or penalties. The FDA and similar governmental authorities in other countries in which we market and sell our products have the authority to require the recall of our products in the event of material deficiencies or defects in design, manufacture or labeling. A government mandated recall, or a voluntary recall by us, could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling and user manuals. Any recall could divert management’s attention, cause us to incur significant expenses, generate negative publicity, harm our reputation with customers, negatively affect our future sales and business, require redesign of the CyberKnife or TomoTherapy Systems, and harm our operating results. In these circumstances, we may also be subject to significant enforcement action. If any of these events were to occur, our ability to introduce new or enhanced products in a timely manner would be adversely affected, which in turn would harm our future growth. We are subject to federal, state and foreign laws applicable to our business practices, the violation of which could result in substantial penalties and harm our business. Laws and ethical rules governing interactions with healthcare providers. The Medicare and Medicaid ‘‘anti-kickback’’ laws, and similar state laws, prohibit soliciting, offering, paying or accepting any payments or other remuneration that is intended to induce any individual or entity to either refer patients to or purchase, lease or order, or arrange for or recommend the purchase, lease or order of, healthcare products or services for which payment may be made under federal and state healthcare programs, such as Medicare and Medicaid. Such laws impact our sales, marketing and other promotional activities by reducing the types of financial arrangements we may have with our customers, potential customers, marketing consultants and other service providers. They particularly impact how we structure our sales offerings, including discount practices, customer support, product loans, education and training programs, physician consulting, research grants and other service arrangements. Many of these laws are broadly drafted and are open to a variety of interpretations, making it difficult to determine with any certainty whether certain arrangements violate such laws, even if statutory safe harbors are available. 47 In addition to such anti-kickback laws, federal and state ‘‘false claims’’ laws generally prohibit the knowing filing or causing the filing of a false claim or the knowing use of false statements to obtain payment from government payors. Although we do not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to ‘‘cause’’ the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, or through certain other activities, including promoting products for uses or indications that are not approved by the FDA. We are also subject to federal and state physician self referral laws. The federal Ethics in Patient Referrals Act of 1989, commonly known as the Stark Law, prohibits, subject to certain exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain ‘‘designated health services’’ if the physician or an immediate family member has any financial relationship with the entity. The Stark Law also prohibits the entity receiving the referral from billing any good or service furnished pursuant to an unlawful referral. Various states have corollary laws to the Stark Law, including laws that require physicians to disclose any financial interest they may have with a healthcare provider to their patients when referring patients to that provider. Both the scope and exceptions for such laws vary from state to state. If our past or present operations are found to be in violation of any of these ‘‘anti-kickback,’’ ‘‘false claims,’’ ‘‘self referral’’ or other similar laws in foreign jurisdictions, we may be subject to the applicable penalty associated with the violation, which may include significant civil and criminal penalties, damages, fines, imprisonment and exclusion from healthcare programs. The impact of any such violations may lead to curtailment or restructuring of our operations, which could adversely affect our ability to operate our business and our financial results. Anti-corruption laws. We are also subject to laws regarding the conduct of business overseas, such as the U.S. Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act of 2010, the Brazil Clean Companies Act, and other similar laws in foreign countries in which we operate. The FCPA prohibits the provision of illegal or improper inducements to foreign government officials in connection with the obtaining of business overseas. Becoming familiar with and implementing the infrastructure necessary to ensure that we and our distributors comply with such laws, rules and regulations and mitigate and protect against corruption risks could be quite costly, and there can be no assurance that any policies and procedures we do implement will protect us against liability under the FCPA or related laws for actions taken by our employees, executive officers, distributors, agents and other intermediaries with respect to our business. Violations of the FCPA or other similar laws by us or any of our employees, executive officers, distributors, agents or other intermediaries could subject us or the individuals involved to criminal or civil liability, cause a loss of reputation in the market, and materially harm our business. Laws protecting patient health information. There are a number of federal and state laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services, or HHS, has promulgated patient privacy rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. These privacy rules protect medical records and other personal health information of patients by limiting their use and disclosure, giving patients the right to access, amend and seek accounting of their own health information and limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose. The HIPAA privacy standard was amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, enacted as part of the American Recovery and Reinvestment Act of 2009. Although we are not a ‘‘covered entity’’ under HIPAA, we are considered a ‘‘business associate’’ of certain covered entities and, as such, we are directly subject to HIPAA, including its enforcement scheme and inspection requirements, and are required to implement policies, procedures as well as reasonable and appropriate physical, technical and administrative security measures to protect individually identifiable health information we receive 48 from covered entities. Our failure to protect health information received from customers in compliance with HIPAA or other laws could subject us to civil and criminal liability to the government and civil liability to the covered entity, could result in adverse publicity, and could harm our business and impair our ability to attract new customers. Transparency laws. The Physician Payment Sunshine Act, or the Sunshine Act, which was enacted by Congress as part of the Patient Protection and Affordable Care Act on December 14, 2011, requires each applicable manufacturer, which includes medical device companies such as Accuray, to track and report to the federal government on an annual basis all payments and other transfers of value from such applicable manufacturer to U.S. licensed physicians and teaching hospitals as well as physician ownership of such applicable manufacturer’s equity, in each case subject to certain statutory exceptions. Such data will be made available by the government on a publicly searchable website. Failure to comply with the data collection and reporting obligations imposed by the Sunshine Act can result in civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum of $150,000 per reporting period) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum of $1 million per reporting period). In addition, we are subject to similar state and foreign laws related to the tracking and reporting of payments and other transfers of value to healthcare professionals, the violation of which could, among other things, result in civil monetary penalties and adversely impact our reputation and business. Conflict Minerals. The Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the SEC under such act require companies, including Accuray, to disclose the existence in their products of certain metals, including tantalum, tin, gold, tungsten and their derivatives, that originate from the Democratic Republic of the Congo and adjoining countries. In addition, such rules require companies to carry out a diligent effort to identify the sourcing of such materials from such region. Complying with these rules requires investigative efforts, which has and will continue to cause us to incur associated costs, and could adversely affect the sourcing, supply, and pricing of materials used in our products, or result in process or manufacturing modifications, all of which could adversely affect our results of operations. If we or our distributors do not obtain and maintain the necessary regulatory approvals in a specific country, we will not be able to market and sell our products in that country. To be able to market and sell our products in a specific country, we or our distributors must comply with applicable laws and regulations of that country. In jurisdictions where we rely on our distributors to manage the regulatory process, we are dependent on their ability to do so effectively. While the laws and regulations of some countries do not impose barriers to marketing and selling our products or only require notification, others require that we or our distributors obtain the approval of a specified regulatory body. These laws and regulations, including the requirements for approvals, and the time required for regulatory review vary from country to country. The governmental agencies regulating medical devices in some countries, for example, require that the user interface on medical device software be in the local language. We currently provide user guides and manuals, both paper copies and electronically, in the local language but only provide an English language version of the user interface. Obtaining regulatory approvals is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals in each country in which we market or plan to market our products. If we modify our products, we or our distributors may need to apply for additional regulatory approvals before we are permitted to sell them. We may not continue to meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. It can also be costly for us and our distributors to keep up with regulatory changes issued or mandated from time to time. If we change distributors, it may be time-consuming and disruptive to our business to transfer the required regulatory approvals, particularly if such approvals are maintained by our third-party distributors on our behalf. If we or our distributors are unable to maintain our 49 authorizations, or fail to obtain appropriate authorizations in a particular country, we will no longer be able to sell our products in that country, and our ability to generate revenue will be materially adversely affected. Within the European Union, we are required under the Medical Device Directive to affix the Conformit´e Europ´eene, or CE, mark on our products in order to sell the products in member countries of the EU. This conformity to the applicable directives is done through self declaration and is verified by an independent certification body, called a Notified Body, before the CE mark can be placed on the device. Once the CE mark is affixed to the device, the Notified Body will regularly audit us to ensure that we remain in compliance with the applicable European laws or directives. CE marking demonstrates that our products comply with the laws and regulations required by the European Union countries to allow free movement of trade within those countries. If we cannot support our performance claims and/or demonstrate or maintain compliance with the applicable European laws and directives, we lose our CE mark, which would prevent us from selling our products within the European Union. Under the Pharmaceutical Affairs Law in Japan, a pre-market approval necessary to sell, market and import a product, or shonin, must be obtained from the Ministry of Health, Labor and Welfare, or MHLW, for our products. Before issuing approvals, MHLW examines the application in detail with regard to the quality, efficacy, and safety of the proposed medical device. The shonin is granted once MHLW is content with the safety and effectiveness of the medical device. The time required for approval varies. A delay in approval could prevent us from selling our products in Japan, which could impact our ability to generate revenue and harm our business. In addition to laws and regulations regarding medical devices, we are subject to a variety of environmental laws and regulations regulating our operations, including those relating to the use, generation, handling, storage, transportation, treatment and disposal of hazardous materials, which laws impose compliance costs on our business and can also result in liability to us. For example, the recast Directive on Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or the RoHS Directive, which began applying to medical devices in July 2014, bans placing new electrical and electronic equipment on the EU market containing more than certain specified levels of lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyl or PBB and polybrominated diphenyl ether. We believe that the RoHS Directive does not impose any restrictions on our products because our products are exempt as large scale fixed installations. The Notified Body which audits our compliance efforts has indicated that they share our view in this respect and that we are and will remain in compliance with the RoHS Directive because the RoHS Directive’s restrictions do not apply to our products. Nevertheless, there can be no guarantee that the EU will not challenge such determination and, accordingly, we intend to comply with the RoHS restrictions, whether or not they apply, and are in the process of updating the way our products are built with a view toward achieving such compliance gradually over time. Healthcare reform legislation could adversely affect demand for our products, our revenue and our financial condition. In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law. The Affordable Care Act provides for, among other things, a 2.3% excise tax on U.S. sales of medical devices, including our products, effective as of 2013. This tax burden may have a material, negative impact on our business, results of operations and cash flow. In addition, these two pieces of legislation include a large number of other health related provisions, including expanding Medicaid eligibility, requiring most individuals to have health insurance, establishing new regulations on health plans, establishing health insurance exchanges, requiring manufacturers to report payments or other transfers of value made to physicians and teaching hospitals, modifying certain payment systems to encourage more cost-effective care and a reduction of 50 inefficiencies and waste and including new tools to address fraud and abuse. The laws also include a decrease in the annual rate of inflation for Medicare payments to hospitals and the establishment of an independent payment advisory board to suggest methods of reducing the rate of growth in Medicare spending. There continue to be many programs and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear what the full impact of the legislation will be. In addition, since the adoption of the Affordable Care Act, other legislation designed to keep federal healthcare costs down has been proposed or passed. For example, under the sequestration required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, Medicare payments for all items and services under Parts A and B incurred on or after April 1, 2013 have been reduced by up to 2%. Future federal legislation may impose further limitations on the coverage or amounts of reimbursement available for our products from governmental agencies or third- party payors. These limitations could have a negative impact on the demand for our products and services, and therefore on our financial position and results of operations. Future legislative or policy initiatives directed at reducing costs could be introduced at either the federal or state level. We cannot predict what healthcare reform legislation or regulations, if any, will be enacted in the United States or elsewhere, what impact any legislation or regulations related to the healthcare system that may be enacted or adopted in the future might have on our business, or the effect of ongoing uncertainty or public perception about these matters will have on the purchasing decisions of our customers. However, the implementation of new legislation and regulation may materially lower reimbursements for our products, materially reduce medical procedure volumes and significantly and adversely affect our business. Risks Related to Our Common Stock Our major stockholders own approximately 42.4% and directors and executive officers own approximately 1.0% of our outstanding common stock as of June 30, 2014, which could limit other stockholders’ ability to influence the outcome of key transactions, including changes of control. As of June 30, 2014, our current holders of 5% or more of our outstanding common stock held in the aggregate approximately 42% of our outstanding common stock, while our directors and executive officers held in the aggregate approximately 1% of our outstanding common stock. This concentration of ownership may delay, deter or prevent a change of control of our company and will make some transactions more difficult or impossible without the support of these stockholders. The price of our common stock is volatile and may continue to fluctuate significantly, which could lead to losses for stockholders. The trading prices of the stock of high-technology companies of our size can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of these companies. Our stock price has experienced periods of volatility. Broad market fluctuations may also harm our stock price. Any negative change in the public’s perception of the prospects of companies that employ similar technology or sell into similar markets could also depress our stock price, regardless of our actual results. In addition to the other risk factors described above and below, factors affecting the trading price of our common stock include: (cid:127) regulatory developments related to manufacturing, marketing or sale of the CyberKnife or TomoTherapy Systems; (cid:127) political or social uncertainties; 51 (cid:127) changes in product pricing policies; (cid:127) variations in our operating results, as well as costs and expenditures; (cid:127) announcements of technological innovations, new services or service enhancements, strategic alliances or significant agreements by us or by our competitors; (cid:127) recruitment or departure of key personnel; (cid:127) changes in earnings estimates by analysts or changes in accounting policies; and (cid:127) market conditions in our industry, the industries of our customers and the economy as a whole. The sale of material amounts of common stock could encourage short sales by third parties and depress the price of our common stock. The downward pressure on our stock price caused by the sale of a significant number of shares of our common stock or the perception that such sales could occur by any of our significant stockholders could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock. Future issuances of shares of our common stock could dilute the ownership interests of our stockholders. Any issuance of equity securities could dilute the interests of our stockholders and could substantially decrease the trading price of our common stock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy (including in connection with acquisitions, strategic collaborations or other transactions), to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding options or for other reasons. In August 2011, we issued $100 million aggregate principal amount of our 3.75% Convertible Senior Notes due August 1, 2016 (the ‘‘3.75% Convertible Notes’’), and in February 2013, we issued $115 million aggregate principal amount of our 3.50% Convertible Senior Notes due February 1, 2018 (the ‘‘3.50% Convertible Notes’’). In April 2014, we issued approximately $70.3 million aggregate principal amount of our 3.50% Series A Convertible Senior Notes due February 1, 2018 (the ‘‘3.50% Series A Convertible Notes,’’ and collectively with the 3.75% Convertible Notes and the 3.50% Convertible Notes, the ‘‘Convertible Notes’’) and paid approximately $0.4 million in cash to refinance approximately $70.3 million aggregate principal amount of our 3.50% Convertible Notes. Following such transactions, approximately $44.7 million aggregate principal amount of the 3.50% Convertible Notes remained outstanding. To the extent we issue common stock upon conversion of the Convertible Notes, that conversion would dilute the ownership interests of our stockholders. Increased leverage as a result of the Convertible Notes offering may harm our financial condition and operating results. As of June 30, 2014, we had total consolidated long-term liabilities of approximately $212.1 million, including the liability component of the 3.75% Convertible Notes in the amount of $88.5 million, the 3.50% Convertible Notes in the amount of $44.7 million and the 3.50% Series A Convertible Notes of $62.4 million. In April 2014, we refinanced approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes held by certain investors (the ‘‘Participating Holders’’) with approximately $70.3 million aggregate principal amount of the 3.50% Series A Convertible Notes. In connection with such transactions, we also paid the Participating Holders approximately $0.4 million in cash. 52 Our level of indebtedness could have important consequences to stockholders and note holders, because: (cid:127) it could affect our ability to satisfy our obligations under the Convertible Notes; (cid:127) a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; (cid:127) it may impair our ability to obtain additional financing in the future; (cid:127) it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and (cid:127) it may make us more vulnerable to downturns in our business, our industry or the economy in general. The conditional conversion features of the 3.75% Convertible Notes and the 3.50% Series A Convertible Notes, if triggered, may adversely affect our financial condition and operating results. In the event the conditional conversion features of the 3.75% Convertible Notes or the 3.50% Series A Convertible Notes are triggered, holders of the 3.75% Convertible Notes or the 3.50% Series A Convertible Notes, as applicable, will be entitled to convert such notes at any time during specified periods at their option. If one or more holders elect to convert such notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying solely cash in lieu of any fractional share), including if we have irrevocably elected full physical settlement upon conversion, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on the applicable conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert such notes, if we have irrevocably elected net share settlement upon conversion we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of such notes as a current rather than long-term liability, which could result in a material reduction of our net working capital. The 3.50% Convertible Notes do not provide for such a conditional conversion feature. Provisions in the indenture for the Convertible Notes, our certificate of incorporation and our bylaws could discourage or prevent a takeover, even if an acquisition would be beneficial in the opinion of our stockholders. Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial in the opinion of our stockholders. These provisions include: (cid:127) authorizing the issuance of ‘‘blank check’’ preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; (cid:127) establishing a classified board of directors, which could discourage a takeover attempt; (cid:127) prohibiting cumulative voting in the election of directors, which would limit the ability of less than a majority of stockholders to elect director candidates; (cid:127) limiting the ability of stockholders to call special meetings of stockholders; (cid:127) prohibiting stockholder action by written consent and requiring that all stockholder actions be taken at a meeting of our stockholders; and (cid:127) establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. 53 In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change of control of our company. Generally, Section 203 prohibits stockholders who, alone or together with their affiliates and associates, own more than 15% of the subject company from engaging in certain business combinations for a period of three years following the date that the stockholder became an interested stockholder of such subject company without approval of the board or 662⁄3% of the independent stockholders. The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock. Furthermore, if a ‘‘fundamental change’’ (as such terms are defined in each the indentures of the Convertible Notes) occurs, holders of the Convertible Notes will have the right, at their option, to require us to repurchase all or a portion of their Convertible Notes. A ‘‘fundamental change’’ generally occurs when there is a change in control of Accuray (acquisition of 50% or more of our voting stock, liquidation or sale of Accuray not for stock) or trading of our stock is terminated. In the event of a ‘‘make-whole fundamental change’’ (as such term is defined in each of the indentures for the Convertible Notes), we may also be required to increase the conversion rate applicable to the Convertible Notes surrendered for conversion in connection with such make-whole fundamental change. A ‘‘make-whole fundamental change’’ is generally a sale of Accuray not for stock in another publicly traded company. In addition, each of the indentures for the Convertible Notes prohibits us from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Convertible Notes. We have not paid dividends in the past and do not expect to pay dividends in the foreseeable future. We have never declared or paid cash dividends on our capital stock. We currently intend to retain all future earnings for the operation and expansion of our business and, therefore, do not anticipate declaring or paying cash dividends in the foreseeable future. The payment of dividends will be at the discretion of our board of directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, and other factors our board of directors may deem relevant. If we do not pay dividends, a return on a stockholders’ investment will only occur if our stock price appreciates. Item 1B. UNRESOLVED STAFF COMMENTS None. Item 2. PROPERTIES Facilities We currently lease approximately 164,000 square feet of product development, manufacturing and administrative space in three buildings in Sunnyvale, California, as follows: (cid:127) A manufacturing building totaling approximately 50,000 square feet, which is leased to us until December 2018; and (cid:127) Two headquarters buildings that are approximately 74,000 square feet and 40,000 square feet, respectively, which are leased to us until December 2023. We have the right to renew the lease term of our headquarters office buildings for two five-year terms upon prior written notice and the fulfillment of certain conditions. 54 Our wholly owned subsidiary, TomoTherapy leases approximately 153,000 square feet of product development, manufacturing and administrative space in three buildings in Madison, Wisconsin, as follows: (cid:127) An office building totaling approximately 61,000 square feet, which is leased to TomoTherapy until June 2018; (cid:127) A manufacturing facility totaling approximately 56,000 square feet, which is leased to TomoTherapy until April 2018; and (cid:127) A portion of an office building totaling approximately 36,000 square feet, which is leased to TomoTherapy until April 2019. In addition, our wholly-owned subsidiary, Accuray Accelerator Technology Company Limited, leases approximately 23,000 square feet of space in a manufacturing facility in Chengdu, China until August 2019. We, directly or through our subsidiaries, also maintain offices in: Pittsburgh, Pennsylvania; Miami, Florida; Durham, North Carolina; Switzerland; France; China; Hong Kong; Japan; Spain; India; Russia; Germany; Italy; Turkey; Belgium; the United Kingdom; Brazil; and the United Arab Emirates. We believe our current facilities are adequate to meet our current needs, but additional space, including additional radiation shielded areas in which systems can be assembled and tested, may be required in the future to accommodate anticipated increases in manufacturing needs. Item 3. LEGAL PROCEEDINGS Refer to Note 8, Commitments and Contingencies, to the Consolidated Financial Statements for a description of certain legal proceedings currently pending against the Company. From time to time we are involved in legal proceedings arising in the ordinary course of our business. Item 4. MINE SAFETY DISCLOSURES Not applicable. 55 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Stock Information Our common stock is traded on the Nasdaq Global Select Market under the symbol ‘‘ARAY.’’ The high and low sale prices for each quarterly period during our fiscal years ended June 30, 2014 and 2013 are as follows: Year ended June 30, 2014 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended June 30, 2013 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $ 7.38 $ 8.73 $10.65 $ 9.53 $ 7.28 $ 7.19 $ 6.78 $ 5.90 $5.41 $6.71 $8.38 $7.77 $5.67 $6.10 $4.18 $4.17 We have never paid cash dividends on our common stock. Our Board of Directors intends to use any future earnings to support operations and reinvest in the growth and development of our business. There are no current plans to pay cash dividends to common stockholders in the foreseeable future. As of August 15, 2014, there were 257 registered stockholders of record of our common stock. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders. During the year ended June 30, 2014, there were no sales of unregistered equity securities by the Company. In April 2014, the Company issued approximately $70.3 million aggregate principal amount of its 3.50% Series A Convertible Notes and paid approximately $0.4 million in cash to refinance approximately $70.3 million aggregate principal amount of its 3.50% Convertible Notes. None of the notes were registered. See the Company’s Current Report on Form 8-K filed on April 25, 2014 for a description of the new notes issued. The Company does not have a stock repurchase program and has not made any share repurchase, excluding repurchases to satisfy minimum tax withholdings, during the year ended June 30, 2014. Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on our common stock between June 30, 2009 and June 30, 2014, with the cumulative total return of (i) the S&P Healthcare Index and (ii) the Nasdaq Composite Index, over the same period. This graph assumes the investment of $100.00 on June 30, 2009 in our common stock, the S&P Healthcare Index and the Nasdaq Composite Index, and assumes the reinvestment of dividends, if any. 56 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Accuray Incorporated, the NASDAQ Composite Index, and the S&P Health Care Index $300 $250 $200 $150 $100 $50 $0 6/09 6/10 6/11 6/12 6/13 6/14 Accuray Incorporated NASDAQ Composite 22AUG201416490755 S&P Health Care * $100 invested on 6/30/09 in stock or index, including reinvestment of dividends. The comparisons shown in the graph above are based upon historical data. We caution that the stock price performance shown in the graph above is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from Research Data Group, a source believed to be reliable, but we are not responsible for any errors or omissions in such information. Item 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and related notes and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ appearing elsewhere in this Form 10-K. The consolidated statements of operations for the years ended June 30, 2014, 2013 and 2012, and the consolidated balance sheet data at June 30, 2014 and 2013 are derived from, and are qualified by reference to, the consolidated financial statements that have been audited by our independent registered public accounting firm, which are included elsewhere in this Form 10-K. The consolidated statements of operations data for the years ended June 30, 2011 and 2010 and the 57 consolidated balance sheet data at June 30, 2012, 2011 and 2010 is derived from our audited consolidated financial statements not included in this Form 10-K. Years Ended June 30, 2014(1) 2013(1)(2) 2012(1)(2) 2011(1)(2) 2010 (in thousands, except per share data) Consolidated Statements of Operations Data: Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue . . . . . . . . . . . . . . . . . . . . . . $369,419 226,619 $ 315,974 218,334 $409,223 271,951 $222,284 115,042 $221,625 117,607 Gross profit . . . . . . . . . . . . . . . . . . . . . . . 142,800 97,640 137,272 107,242 104,018 Operating expenses: Research and development . . . . . . . . . . . . . Selling and marketing . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . 53,724 61,885 45,335 66,197 54,372 57,726 81,287 54,547 57,672 41,301 37,181 56,589 31,523 34,187 35,472 Total operating expenses . . . . . . . . . . . . . 160,944 178,295 193,506 135,071 101,182 Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net (18,144) (14,216) (80,655) (13,133) (56,234) (12,521) (27,829) 2,288 2,836 1 Income (loss) before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (benefit from) income taxes . . . . (32,360) 3,088 (93,788) 3,573 (68,755) 2,595 (25,541) 1,116 Income (loss) from continuing operations . . . . (35,448) (97,361) (71,350) (26,657) 2,837 (4) 2,841 Loss from operations of a discontinued variable interest entity . . . . . . . . . . . . . . Impairment of indefinite lived intangible asset of discontinued variable interest entity . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from deconsolidation of a variable interest entity . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations, net of tax of $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations attributable to non-controlling interest . . . Loss from discontinued operations attributable to stockholders . . . . . . . . . . . . . . . . . . . . . — — — — — — (3,505) (7,103) (454) (12,200) (3,442) — — — — (19,147) (7,103) (454) (13,289) (6,411) (429) (5,858) (692) (25) — — — — — — Net Income (loss) attributable to stockholders $ (35,448) $(103,219) $ (72,042) $ (26,682) $ 2,841 Income (loss) per share attributable to stockholders Basic—continuing operations . . . . . . . . . Diluted—continuing operations . . . . . . . . Basic—discontinued operations . . . . . . . . Diluted—discontinued operations . . . . . . Basic—net income (loss) . . . . . . . . . . . . . Diluted—net income (loss) . . . . . . . . . . . $ $ $ $ $ $ (0.47) $ (0.47) $ — $ — $ (0.47) $ (0.47) $ (1.33) $ (1.33) $ (0.08) $ (0.08) $ (1.41) $ (1.41) $ (1.01) $ (1.01) $ (0.01) $ (0.01) $ (1.02) $ (1.02) $ (0.44) $ (0.44) $ (0.00) $ (0.00) $ (0.44) $ (0.44) $ 0.05 0.05 — — 0.05 0.05 Weighted average common shares used in computing income (loss) per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 75,804 75,804 73,281 73,281 70,887 70,887 60,085 60,085 57,560 60,191 58 As of June 30, 2014(1) 2013(1)(2) 2012(1)(2) 2011(1)(2) 2010 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt Total stockholders’ equity . . . . . . . . . . . . . . $ 92,346 $ 79,553 $179,901 $495,188 $195,612 $ 98,548 $ 73,313 $101,084 $180,076 $475,929 $198,768 $106,835 — $ $143,504 $ $142,084 $473,170 $ 79,466 $195,625 $ 95,906 $ 45,434 — $ 99,881 $152,048 $263,184 — $170,076 — $ $ 82,678 $455,784 $ $229,775 (1) We acquired TomoTherapy on June 10, 2011. As a result, our results for the fiscal year ended June 30, 2011 include revenues, cost of revenues and operating expenses of TomoTherapy for the 20-day period from the acquisition date to the end of our fiscal year (June 30, 2011). Our results for the years ended June 30, 2014, 2013 and 2012 include revenues, cost of revenues and operating expenses of TomoTherapy for the full fiscal years. In addition, we made a number of purchase accounting adjustments to the recorded values of assets and liabilities acquired from TomoTherapy as of the acquisition date (June 10, 2011). (2) On December 21, 2012, we entered into a Purchase Agreement and Release with Compact Particle Acceleration Corporation, or CPAC, under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement and Release, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of December 21, 2012. The results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded for the years ended June 30, 2013, 2012 and 2011 have been reported as discontinued operations. 59 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form 10-K, particularly in ‘‘Risk Factors.’’ See ‘‘Special Note Regarding Forward-Looking Statements.’’ Overview Products and Markets Company Accuray Incorporated is a radiation oncology company that develops, manufactures, sells and supports precise, innovative treatment solutions. Our leading edge technologies are designed to deliver advanced radiation therapy including radiosurgery, stereotactic body radiation therapy, intensity modulated radiation therapy, image guided radiation therapy and adaptive radiation therapy tailored to the specific needs of each patient. Our suite of products includes the CyberKnife(cid:3) Systems and the TomoTherapy(cid:3) Systems. The systems are complementary offerings, optimized to serve separate patient populations treated by the same medical specialty, with advanced capabilities that offer increased treatment flexibility. 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 experienced low manufacturing yields and initially delivered only a small number of units. Our initial life-cycle testing revealed that the units did not have the durability that we, and our customers, expect in our products. Currently, our internal testing of the MLC has been concluded to our satisfaction and we have begun our evaluation of the MLC in the field, with the goal of ensuring that we introduce a clinically effective and reliable collimator. 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. 60 We believe that the long term success of the CyberKnife Systems is dependent on a number of factors including the following: (cid:127) Adoption of our CyberKnife M6 Series Systems; (cid:127) Production and shipment of our MLC that meets the standards that we, and our customers, expect in our products; (cid:127) Change in medical practice to utilize radiosurgery more regularly as an alternative to surgery or other treatments; (cid:127) Greater awareness among doctors and patients of the benefits of radiosurgery with the CyberKnife Systems; (cid:127) 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; (cid:127) Continued advances in technology that improve the quality of treatments and ease of use of the CyberKnife Systems; (cid:127) Improved access to radiosurgery with the CyberKnife Systems in various countries through regulatory approvals; (cid:127) Medical insurance reimbursement policies that cover CyberKnife System treatments; and (cid:127) 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 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 will be influenced by a number of factors including the following: (cid:127) Adoption of our TomoTherapy H Series Systems; (cid:127) Greater awareness among doctors and patients of the benefits of radiation therapy using TomoTherapy Systems; (cid:127) Advances in technology which improve the quality of treatments and ease of use of TomoTherapy Systems; (cid:127) Greater awareness among doctors of the improvement in reliability of TomoTherapy Systems; and (cid:127) Expansion of TomoTherapy System sales in countries throughout the world. 61 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 sales agent 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 throughout the world. Backlog We report backlog in the following manner: (cid:127) Products: Orders for systems, upgrades excluding those acquired through the upgrade rights included in our Diamond service contracts, are reported in backlog, excluding amounts attributable to post-contractual-services (warranty period services and post warranty services or PCS), installation, training and professional services. (cid:127) 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 is recognizable as product revenue is reported as backlog. The portion of the order that is recognized as service revenue (for example, PCS) is not included in reported backlog. Product backlog totaled $364.7 million as of June 30, 2014. This included $40.7 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, $33.3 million of CyberKnife orders contain a technology protection plan which provides the customer the option to upgrade to the new platform (M6) when the CyberKnife M6 Series is approved by regulatory authorities in their country and is therefore available for shipment to the customer. In order for the product portion of a sales agreement to be counted as backlog, it must meet the following criteria: (cid:127) 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; (cid:127) The contract is non-contingent—it either has cleared all its contingencies or contains no contingencies when signed; (cid:127) 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; (cid:127) The specific end customer site has been identified by the customer in the written contract or written amendment; (cid:127) For orders in our Latin America region, we request supporting evidence that the end customer has commenced construction to place our products if the site does not already exist; and 62 (cid:127) 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 includes, 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. Results of Operations Fiscal 2014 results compared to 2013 (in thousands, except percentages) (Dollars in thousands) Years ended June 30, 2014 2013 Amount %(a) Amount %(a) 2014 - 2013 % change Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173,607 195,812 47% $ 137,403 178,571 53 43% 57 Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $369,419 100% $ 315,974 100% Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $142,800 39% $ 97,640 31% Products gross profit . . . . . . . . . . . . . . . . . . . . . . Services gross profit . . . . . . . . . . . . . . . . . . . . . . . Research and development expenses . . . . . . . . . . . . Selling and marketing expenses . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations attributable to 76,015 66,785 53,724 61,885 45,335 14,216 3,088 44 34 15 17 12 4 1 51,905 45,735 66,197 54,372 57,726 13,133 3,573 stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 5,858 38 26 21 17 18 4 1 2 26% 10 17% 46% 46 46 (19) 14 (21) 8 (14) (100) Net loss attributable to stockholders . . . . . . . . . . . $ (35,448) 10% $(103,219) 33% (66)% (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. On December 21, 2012, we entered into a Purchase Agreement and Release with CPAC, under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement and Release, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of December 21, 2012. The results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded for the year ended June 30, 2013, has been reported as discontinued operations. Refer to Note 7, ‘‘Investment in CPAC’’ for further details. Net revenue Revenue derived from sales outside of the Americas region was $213.2 million and $172.4 million for the years ended June 30, 2014 and 2013, respectively, and represented 58% and 55% of our net revenue during these periods, respectively. Product net revenue increased by $36.2 million for the year ended June 30, 2014 as compared to the year ended June 30, 2013. Product net revenue increased primarily due to a higher number of units sold offset by product mix. The number of units sold in fiscal 2014 increased by 40% as compared to fiscal 2013. In addition, product revenue upgrades increased by $3.0 million in fiscal 2014. 63 Services net revenue increased by $17.2 million for the year ended June 30, 2014 as compared to the year ended June 30, 2013. The increase of $13.2 million was attributable to a net increase in our installed base and customer conversion to higher priced maintenance contracts (particularly the TomoTherapy Systems). The remaining increase of $4.0 million was primarily due to an increase in installation, training and spare parts revenue due to the increased number of units installed. Gross profit The overall gross profit margin for the year ended June 30, 2014 increased by 8 percentage points as compared to the year ended June 30, 2013. Product gross margin for fiscal 2014 increased by 6 margin points as compared to fiscal 2013 mostly due to increased revenues reducing fixed costs per unit, reduction in charges for obsolete or excess inventory, and due to the favorable impact of a net reduction in backlog intangible asset amortization expense of $1.6 million resulting from the acquisition of TomoTherapy on June 10, 2011. Services gross margin for the year ended June 30, 2014 increased by 8 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, partially offset by the increase in bonus expense. Research and development expenses Research and development expenses were $53.7 million for the year ended June 30, 2014 as compared to $66.2 million for the year ended June 30, 2013, which represents a decrease of $12.5 million, or 19%. The decrease was primarily due to lower compensation expense of $12.0 million resulting from the re-organization of the research and development function during the third quarter of fiscal 2013. Additionally, project related consulting costs decreased by $4.3 million due to the completion of various research and development projects. The decrease was offset by the higher bonus expense of $3.2 million and higher share-based compensation expense of $0.6 million. We anticipate that research and development expenses in fiscal 2015 will be higher than fiscal 2014 based on the current schedule of our development projects. Selling and marketing expenses Selling and marketing expenses for the year ended June 30, 2014 were $61.9 million as compared to $54.4 million for the year ended June 30, 2013, which represents an increase of $7.5 million, or 14%. The increase was partially attributable to a $8.0 million increase in compensation and compensation related expenses, which consisted mainly of the increase in commission expense of $2.9 million due to higher sales, a $2.0 million increase in bonus expense, a $2.1 million increase in payroll expense due to increases in personnel and a $0.9 million increase in share-based compensation expense mainly due to the increase in grants of equity awards and higher values per grant. Consulting expense increased by $0.5 million due to sales optimization initiatives. The increase was offset by lower trade show expense of $1.5 million, which was higher for the year ended June 30, 2013 due to the introduction of two new products at an industry trade show during fiscal 2013. We anticipate selling and marketing expenses to increase in fiscal 2015 from fiscal 2014 due to anticipated increases in headcount and compensation expenses. General and administrative expenses General and administrative expenses for the year ended June 30, 2014 were $45.3 million as compared to $57.7 million for the year ended June 30, 2013, which represents a decrease of $12.4 million, or 21%. This decrease was partially attributable to $7.4 million of severance charges incurred in fiscal 2013 for the departure of our former Chief Executive Office, Chief Operating Officer and other employees, and $1.7 million related to lease acceleration and fixed asset disposal charges 64 from vacating an office facility in fiscal 2013. The allowance for doubtful accounts expense decreased by $1.5 million in fiscal 2013 due to improved cash collections. In addition, payroll and contractual labor expenses decreased by $2.2 million and consulting, legal and accounting related expenses decreased by $2.5 million due to cost control initiatives. The decrease was offset by higher bonus expense of $2.4 million and higher share-based compensation expense of $1.1 million during the year ended June 30, 2014 as compared to the year ended June 30, 2013. Other income (expense), net Net other expense for the year ended June 30, 2014 was $14.2 million as compared to $13.1 million for the year ended June 30, 2013, which represents an increase of $1.1 million. In fiscal 2014, we recognized $14.3 million of interest expense related to our Convertible Notes, partially offset by interest income of $0.6 million from our available-for-sale investments and a $0.1 million gain from foreign currency exchange. We also incurred $0.6 million other expense in fiscal 2014 primarily related to the exchange of our 3.50% Convertible Notes to the 3.50% Series A Convertible Notes in April 2014. In fiscal 2013, we recognized net other expense of $13.1 million primarily due to $10.4 million of interest expense related to our Convertible Notes and $2.7 million of foreign currency losses primarily resulting from the depreciation of the Japanese Yen against the U.S. Dollar and the appreciation of the Euro against the U.S. dollar. Provision for income taxes The provision for income taxes was lower in fiscal 2014 compared to fiscal 2013 mainly due to the activities in international locations—reduction of benefits related to uncertain tax positions offset by the increased foreign earnings. At June 30, 2014, we had federal and state net operating loss carryforwards of $320.5 million and $166.8 million, respectively. These federal and state net operating loss carryforwards are available to offset future taxable income, if any, in varying amounts and will begin to expire in 2019 for federal and 2015 for state purposes, respectively. Such net operating loss carryforwards include tax benefits from employee stock option exercises in excess of the share-based compensation expense that has been recognized for these awards. We will record approximately $3.9 million as a credit to additional paid-in capital if and when such excess benefits are ultimately realized. We also had federal and state research and development tax credit carryforwards of approximately $16.1 million and $15.7 million, respectively. If not utilized, the federal research credits will begin to expire in 2019, the California research credits have no expiration date and the other state research credits begin to expire in 2015. Realization of the deferred tax assets, among other factors, is dependent on our ability to generate sufficient taxable income prior to the expiration of the carryforwards. Due to the inconsistent history of net operating income as adjusted for permanent differences, we cannot conclude that the net domestic deferred tax assets will more likely than not be realized. Accordingly, we have recorded a full valuation allowance against our domestic net deferred tax assets. At June 30, 2014, there was no provision for U.S. income tax for undistributed earnings of our foreign subsidiaries as it is currently our intention to reinvest these earnings indefinitely in operations outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income tax have been provided as of June 30, 2014 was $14.7 million. If repatriated, these earnings could result in a tax expense at the current U.S. Federal statutory tax rate of 35%, subject to available net operating losses and other factors. Subject to limitation, tax on undistributed earnings may also be reduced by foreign tax credits that may be generated in connection with the repatriation of earnings. 65 Loss from Discontinued Operations The results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded for the years ended June 30, 2013 and 2012 were disclosed as discontinued operations. Impairment of Indefinite Lived Intangible Assets In fiscal 2013, we incurred impairment charges of $12.2 million related to the write-down of our in-process research and development, or IPR&D, asset based on results of research and development work carried out by CPAC, then a variable interest entity consolidated by us. See Note 6, ‘‘Goodwill and Purchased Intangible Assets’’, to the consolidated financial statements for details. Loss from Deconsolidation of CPAC On December 21, 2012, we entered into a Purchase Agreement and Release with CPAC, under which all the equity and debt investments held by us in CPAC were purchased by CPAC for a nominal consideration. As a result of the Purchase Agreement, we concluded that we were no longer the primary beneficiary of CPAC, and therefore, deconsolidated CPAC as of that date. We recorded a loss of $3.4 million in the second quarter of fiscal 2013 due to the write-down of the carrying value of CPAC’s net liabilities, the write-off of the receivables from CPAC and the non-controlling interest in CPAC, net of cash consideration received. Fiscal 2013 results compared to 2012 (in thousands, except percentages) (Dollars in thousands) Years ended June 30, 2013 2012 Amount %(a) Amount %(a) 2013 - 2012 % change Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 137,403 178,571 43% $240,472 168,751 57 59% 41 Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315,974 100% $409,223 100% Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,640 31% $137,272 34% Products gross profit . . . . . . . . . . . . . . . . . . . . . . Services gross profit . . . . . . . . . . . . . . . . . . . . . . . Research and development expenses . . . . . . . . . . . . Selling and marketing expenses . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations attributable to 51,905 45,735 66,197 54,372 57,726 13,133 3,573 stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,858 38 26 21 17 18 4 1 2 104,292 32,980 81,287 54,547 57,672 12,521 2,595 43 20 20 13 14 3 1 (43)% 6 (23)% (29)% (50) 39 (19) (0) 0 5 38 692 — 747 Net loss attributable to stockholders . . . . . . . . . . . $(103,219) 33% $ (72,042) 18% 43% (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 Revenue derived from sales outside of the Americas region was $172.4 million and $220.2 million for the years ended June 30, 2013 and 2012, respectively, and represented 55% and 54% of our net sales during these periods, respectively. 66 Total net revenue decreased by $93.2 million in fiscal 2013 compared to fiscal 2012, primarily due to a $103.1 million decrease in product revenue, partially offset by an increase in service revenues of $9.8 million. The decrease in product revenue was primarily attributable to a 48% decrease in the number of systems sold during fiscal 2013 as compared to fiscal 2012. During fiscal 2013, product revenues from the sale of our systems slowed primarily in the North America and Asia-Pacific regions due to the slowdown in capital expenditures by hospitals, continued uncertainties around economic growth in certain key markets, the delay in availability of the new models of the CyberKnife Systems and the TomoTherapy Systems, and the lack of availability of the MLC option for the new CyberKnife M6 Series Systems. Services revenues during fiscal 2013 increased by $9.8 million as compared to fiscal 2012. Service revenues during fiscal 2012 included $11.5 million of service revenues arising from purchase accounting adjustments related to the TomoTherapy acquisition which was completed in June 2011. Such purchase accounting adjustments were not material during fiscal 2013. Excluding such adjustments, service revenues increased by $21.3 million during fiscal 2013 as compared to fiscal 2012 primarily due to an increase in the installed base by 58 systems contributing $14.5 million of incremental revenue, sales of higher priced maintenance contracts (particularly to customers using the TomoTherapy systems) contributing $3.0 million of incremental revenue and increased revenues of $4.5 million resulting from providing direct maintenance services to customers in Japan. Gross profit The overall gross profit margin during fiscal 2013 declined by 3 percentage points as compared to fiscal 2012. Product margins were lower during fiscal 2013 primarily due to higher cost of units sold attributed to higher per-unit production-related costs resulting from lower volume of production and higher charges for write-down of inventories, partially offset by the favorable impact of a net reduction in purchase accounting adjustments resulting from the acquisition of TomoTherapy on June 10, 2011. Service margins were higher during fiscal 2013 primarily due to improvements in the reliability of the TomoTherapy Systems leading to reduced parts and labor usage and other cost saving initiatives, partially offset by the unfavorable impact of a net reduction in purchase accounting adjustments resulting from the acquisition of TomoTherapy on June 10, 2011. In accordance with purchase accounting standards, a number of adjustments were recorded to the value of assets and liabilities of TomoTherapy as of the closing of the acquisition on June 10, 2011. These included the write-up of inventory based on selling price rather than cost of manufacturing, the write-down of deferred product revenue, the write-up of deferred service revenue, and the recording of intangible assets related to developed technology and to backlog existing at the time of the acquisition. On the acquisition date, deferred service and product revenues were valued at cost plus a reasonable margin. Purchase accounting adjustments reduced gross profit for fiscal 2013 by $8.6 million as follows: Product revenues were reduced by $0.4 million, while product cost of revenues was increased by $8.5 million; Services revenues were increased by $0.1 million while services cost of revenues was decreased by $0.2 million. Purchase accounting adjustments decreased gross profits for fiscal 2012 by $14.9 million as follows: Product revenues were reduced by $2.3 million while product cost of revenues was increased by $23.5 million; Services revenues were increased by $11.5 million while services cost of revenues was increased by $0.6 million. Research and development expenses Research and development expenses were $66.2 million for the year ended June 30, 2013 as compared to $81.3 million for the year ended June 30, 2012, which represents a decrease of $15.1 million, or 19%. The decrease was primarily due to decreases in consulting and project related costs of $8.0 million, compensation related costs of $3.7 million, facilities and information technology related costs of $2.4 million and travel related costs of $0.9 million resulting from cost control 67 initiatives and a reduction in development related activities after two new product introductions at an industry trade show in October 2012 as well as a re-organization of the research and development function during the third quarter of fiscal 2013. Selling and marketing expenses Selling and marketing expenses for the year ended June 30, 2013 were $54.4 million as compared to $54.6 million for the year ended June 30, 2012, which represents a decrease of $0.2 million. The decrease was partially attributable to lower travel related expenses of $0.8 million and other operational expenses of $0.2 million due to cost control initiatives, partially offset by higher tradeshow and advertising related expenses of $0.8 million related to the introduction of two new products at an industry trade show in October 2012. General and administrative expenses General and administrative expenses remained relatively consistent between fiscal 2013 and 2012. However, we incurred additional compensation and severance related charges of $7.4 million during fiscal 2013 due to the departure of our former Chief Executive Office, Chief Operating Officer and other employees during the second quarter of fiscal 2013 and the restructuring of operations during the third quarter of fiscal 2013. During fiscal 2013, we incurred $1.4 million of lease termination charge, net of estimated sub-lease income, for the remaining lease obligations on an office facility that we vacated, and a charge of $0.3 million related to the disposition of certain fixed assets and the write-down of leasehold improvements at this office facility. Additionally, we incurred higher operational costs of $1.6 million during fiscal 2013 primarily due to write-off of non-recoverable VAT. This was partially offset by lower consulting, legal and accounting related expenses of $5.4 million, lower compensation related costs of $3.2 million, lower travel related expenses of $1.0 million and lower facilities and information technology related costs of $0.7 million due to cost control initiatives. Other income (expense), net Net other expense increased by $0.6 million during fiscal 2013 as compared to fiscal 2012. During fiscal 2013, we recognized net other expense of $13.1 million primarily due to $10.4 million of interest expense related to our 3.75% and 3.50% Convertible Notes and $2.7 million of foreign currency losses primarily resulting from the depreciation of the Japanese Yen against the U.S. Dollar and the appreciation of the Euro against the U.S. Dollar and their effects on the re-measurement of balances denominated in those currencies. During fiscal 2012, we recognized net other expense of $12.5 million primarily due to $7.4 million of interest expense related to our 3.75% Convertible Notes, which were issued on August 1, 2011 and $4.4 million of foreign currency losses primarily resulting from the strengthening of the U.S. Dollar against the Euro and the Swiss Franc and their effects on the re-measurement of balances denominated in those currencies. Provision for income taxes The provision for income taxes was higher in fiscal 2013 compared to fiscal 2012 primarily due to the increased earnings in international locations. Share-based Compensation Expense In fiscal 2014, 2013 and 2012, we recorded share-based compensation expense of $11.3 million, $8.2 million and $8.5 million, respectively, related to awards under our incentive stock plans and restricted stock awards, or RSAs, assumed in connection with the acquisition of TomoTherapy. Share- based compensation expense was recorded net of estimated forfeitures (excludes share-based awards 68 not expected to vest). As of June 30, 2014, we had approximately $20.2 million of unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options, Employee Stock Purchase Plan, or ESPP shares, restricted stock units, or RSUs, market stock units, or MSUs, which we expect to recognize over a weighted average period from 0.6 to 2.4 years. Liquidity and Capital Resources At June 30, 2014, we had $92.3 million in cash and cash equivalents and $79.6 million in investments. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks included in Part I, Item 1A titled ‘‘Risk Factors.’’ Also refer to Note 13, ‘‘Debt’’ to the 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 June 30, 2014 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 June 30, 2014, we had approximately $45.9 million of cash and cash equivalents at our foreign subsidiaries. Cash Flows Net cash provided by (used in) operating activities . . . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . $ 346 8,492 8,377 1,818 $ (66,177) $ (38,279) (12,153) (121,622) 100,549 117,917 (2,519) (309) Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . $19,033 $ (70,191) $ 47,598 Fiscal years ended June 30, 2014 2013 2012 Operating Activities Net cash provided by operating activities was $0.3 million in fiscal 2014 as compared to $66.2 million used in 2013. Net cash provided by operating activities in 2014 was primarily related to: (cid:127) Net loss of $35.4 million; (cid:127) Net loss offset by non-cash items of $42.9 million related to depreciation of fixed assets, amortization of intangible assets, share-based compensation, amortization and accretion of discount and premium on investments, amortization of debt issuance costs, accretion of interest on long-term debt, recovery of doubtful accounts receivable, loss on disposal of property and equipment, and provision for excess and obsolete inventory; (cid:127) Increase in accounts receivable of $14.8 million as a result of increased sales of $53.4 million offset by cash collections from customers in fiscal 2014; (cid:127) Increase in inventories of $8.3 million due to increase in purchases to support sales; (cid:127) Increase in prepaid expenses and other assets of $5.2 million primarily due to the increase in prepaid commissions balance of $2.8 million as a result of the increase in orders and prepaid taxes of $2.9 million mostly in foreign locations; (cid:127) Increase in accounts payable of $1.1 million due to the increase in inventory and timing of payments; 69 (cid:127) Increase in accrued liabilities of $21.7 million primarily due to the increase in accrued bonus expense of $14.2 million, increase in other accrued compensation related expense of $6.0 million; (cid:127) Increase in customer advances of $1.7 million due to the payments received for the future revenue deliverables; and (cid:127) Increase in deferred revenue of $4.0 million due to the timing of customer billing and revenue recognition, and increase deferred cost of $4.9 million due to the timing of inventory transfer. Net cash used in operating activities was $66.2 million in fiscal 2013 as compared to $38.3 million used in 2012. Net cash used in operating activities in 2013 was primarily related to: (cid:127) Net loss of $116.5 million, comprised of $97.4 million from continuing operations and $19.1 million from discontinued operations; (cid:127) Non-cash related items of $62.1 million corresponding to the depreciation and amortization expenses, impairment charges related to in-process research and development assets, share-based compensation expenses, inventory write-downs due to obsolescence of certain customized parts, accretion of interest expense on the 3.75% Convertible Notes and loss on deconsolidation of CPAC; (cid:127) Increase in inventories of $5.1 million due to delays in shipping newly introduced products; (cid:127) Decrease in accounts receivable of $10.9 million due to lower billings during the year; and (cid:127) Decrease in accrued liabilities of $18.5 million due to timing of vendor payments, payment of accrued bonuses for the prior fiscal year, reduction of compensation related accruals, payments for inventory buy-back obligations and other liabilities. Cash Flows From Investing Activities Net cash provided by investing activities was $8.5 million in fiscal 2014, which primarily consisted of purchases of property and equipment of $11.9 million and purchases of investments of $44.2 million, offset by sales and maturities of short-term investments of $64.6 million. Net cash used in investing activities was $121.6 million in fiscal 2013, which was primarily comprised of purchases of investment securities for $102.4 million, purchases of property and equipment for $15.1 million and $3.9 million related to the acquisition of Morphormics. Cash Flows From Financing Activities Net cash provided by financing activities during fiscal 2014 was $8.4 million, attributable to $9.1 million from proceeds from employee stock plans, partially offset by $0.3 million of taxes paid related to net share settlement of equity awards and $0.4 million in payments to convertible note holders to refinance approximately $70.3 million aggregate principal amount of our 3.50% Convertible Notes. Net cash provided by financing activities during fiscal 2013 was $117.9 million. In February 2013, we issued the 3.50% Convertible Notes for net proceeds of $110.5 million. In addition, we received cash proceeds of $7.5 million from the exercise of stock options by our employees and the purchase of common stock under our ESPP. Operating Capital and Capital Expenditure Requirements Our future capital requirements depend on numerous factors. These factors include but are not limited to the following: (cid:127) Revenue generated by sales of our products and service plans; 70 (cid:127) Costs associated with our sales and marketing initiatives and manufacturing activities; (cid:127) Facilities, equipment and IT systems required to support current and future operations; (cid:127) Rate of progress and cost of our research and development activities; (cid:127) Costs of obtaining and maintaining FDA and other regulatory clearances of our products; (cid:127) Effects of competing technological and market developments; (cid:127) Number and timing of acquisitions and other strategic transactions. We believe that our current cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least 12 months. If these sources of cash, cash equivalents and investments are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts. Contractual Obligations and Commitments The following is a schedule summarizing our obligations to make future payments under contractual obligations as of June 30, 2014: Convertible Notes(1) . . . . . . . Interest on Convertible Notes Operating leases . . . . . . . . . . Payments due by period Total $215,000 22,236 53,645 Less than 1 year 1 - 3 years 3 - 5 years $ — $100,000 12,113 16,500 7,775 6,427 $115,000 2,348 12,749 More than 5 years $ — — 17,969 Total . . . . . . . . . . . . . . . . . $290,881 $14,202 $128,613 $130,097 $17,969 (1) Any conversion, redemption or purchase of Convertible Notes would impact our cash payments noted in the preceding table. Our purchase commitments and obligations include all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which we have not received the goods or services and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services, and hence, have not been included in the table above. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles 71 generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions. All of our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Management believes the critical accounting policies and estimates are those related to revenue recognition, business combinations and assessment of recoverability of goodwill and intangible assets, valuation of inventories, share-based compensation expense, convertible notes, income taxes, allowance for doubtful accounts and loss contingencies. Revenue Recognition We frequently enter into sales arrangements with customers that contain multiple elements or deliverables and we have to make a number of reasoned judgments with respect to elements of these sales arrangements, including how to allocate the proceeds received from an arrangement, whether there are multiple elements in the arrangement, whether any undelivered elements are essential to the functionality of the delivered elements and the appropriate timing of revenue recognition with respect to these arrangements. For sale arrangements that contain multiple elements, we allocate the arrangement consideration to each element based on the relative selling price method, whereby the relative selling price of each deliverable is determined using vendor specific objective evidence, or VSOE, of fair value, if it exists. VSOE of fair value for each element is based on our standard rates charged for the product or service when such product or service is sold separately or based upon the price established by the Company’s pricing committee when that product or service is not yet being sold separately. When we are not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to us infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, we attempt to determine the selling price of each element based on third-party evidence of selling price, or TPE, as determined based on competitors’ prices for similar deliverables when sold separately. TPE typically is difficult to establish due to the proprietary differences of competitive products and difficulty in obtaining reliable competitive standalone pricing information. When we are not able to establish selling price using VSOE or TPE, we use our best estimate of selling price, or BESP, in the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin. The determination of BESP is made through consultation with our pricing committee, taking into consideration its overall go-to-market pricing strategy. Revenue recognition also depends on all or a combination of the following: timing of shipment, completion of installation, customer acceptance and the readiness of customers’ facilities. If shipments are not made on scheduled timelines, installation schedules are delayed or if the products are not accepted by the customer in a timely manner, our reported revenues may differ materially from expectations. 72 Business Combinations and Assessment of Recoverability of Goodwill and Intangible Assets Our methodology for allocating the purchase price relating to business combinations is determined through established valuation techniques. The allocation of the purchase price to intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and appropriate discount rate for those cash flows. Goodwill represents the excess of the purchase price over the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill is not amortized, but is evaluated for impairment on an annual basis and when impairment indicators are present. We have one operating segment and one reporting unit. Therefore, our consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on the closing price of our common stock on the trading day closest to the annual review date multiplied by the outstanding shares on that date. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and we must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required. We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Impairment, if any, is measured as the amount by which the carrying value exceeds the fair value of the impaired asset. We review indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts. Valuation of Inventories The valuation of inventory requires us to estimate obsolete or excess inventory as well as damaged inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. We regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand to support future sales and service. If our demand forecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could be required to write off inventory, which would negatively impact our gross margin. Share-Based Compensation Expense We use the Black-Scholes option valuation model to estimate the fair value of stock options and ESPP shares. These valuation models require the input of highly subjective assumptions, the most significant of which is our estimates of expected volatility and the expected term of the award. Our expected volatility is derived from the historical volatilities of our common stock. Prior to the second quarter of fiscal 2013, our expected volatility was based on the historical volatilities of several unrelated public companies within industries related to our business. We estimate the expected term of stock option by taking the average of the vesting term and the contractual term of the option, as illustrated by the simplified method. We use the Monte-Carlo simulation model to estimate the fair value of 73 MSUs. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. We recognize compensation cost for only those shares expected to vest over the requisite service period of the award. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on recent forfeiture activity and expected future employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. Convertible Notes We account for convertible notes in accordance with ASC 470-20 Debt with Conversion and Other Options. ASC 470-20 clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement at our election. ASC 470-20 specifies that an issuer of such instruments should separately account for the liability and equity component of the conversion option. The amount recorded as debt is based on the fair value of the debt component as a standalone instrument, determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance. The difference between the debt recorded at inception and its principal amount is accreted to principal during the estimated life of the note. Income Taxes We determine our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which is generally in the third quarter of the subsequent year for U.S. federal and state provisions, respectively. We have placed a full valuation allowance on all net U.S. deferred tax assets because realization of these tax benefits through future taxable income cannot be reasonably assured. We intend to maintain the valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all of the valuation allowance would be based on our estimate of future profitability. If our estimate were to be wrong, we could be required to charge potentially significant amounts to income tax expense to establish a new valuation allowance. Our effective tax rate includes the impact of certain undistributed foreign earnings for which we have not provided U.S. taxes because we plan to reinvest such earnings indefinitely outside the United States. We plan foreign earnings remittance amounts based on projected cash flow needs as well as the working capital and long-term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. We are subject to income taxes in the United States and certain foreign countries, and we are subject to corporate income tax audits in some of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates. We evaluate our uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes. We believe that our reserve for uncertain tax positions is adequate. We review our reserves quarterly, and we may adjust such reserves because of proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously 74 unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, or the expiration of statutes of limitations. Allowance for Doubtful Accounts We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If our evaluation of our customers’ financial conditions does not reflect our future ability to collect outstanding receivables, additional provisions may be needed and our operating results could be negatively affected. Loss Contingencies As discussed in Note 8, Commitments and Contingencies, to the consolidated financial statements, we are involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. We record a provision for a liability when we believe that it is both 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. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, we could incur significant charges related to legal matters which could have a material impact on our results of operations, financial position and cash flows. 75 Item 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions. Foreign Currency Exchange Rate Risk Future fluctuations in the value of the U.S. dollar may affect the price competitiveness of our products outside the United States. For direct sales outside the United States, we sell in both U.S. dollars and local currencies, which could expose us to additional foreign currency risks, including changes in currency exchange rates. Our operating expenses in countries outside the United States, are payable in foreign currencies and therefore expose us to currency risk. To the extent that management can predict the timing of payments under sales contracts or for operating expenses that are denominated in foreign currencies, we may engage in hedging transactions to mitigate such risks in the future. Interest Rate Risk We maintain an investment portfolio of various holdings, types, and maturities. These securities are generally classified as available for sale and consequently, are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss). At any time, a sharp rise or decline in interest rates could have a material adverse impact on the fair value of our investment portfolio. Likewise, increases and decreases in interest rates could have a material impact on interest earnings for our portfolio. The following table presents the hypothetical change in fair values in the financial instruments we held at June 30, 2014 that are sensitive to changes in interest rates. The modeling technique used measures the change in fair values arising from selected potential changes in interest rates on our investment portfolio, which had a fair value of $79.6 million at June 30, 2014. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 100, 75, 50 and 25 basis points (in thousands). Change in interest rate (cid:6)100 BPS (cid:6)75 BPS (cid:6)50 BPS (cid:6)25 BPS 25 BPS 50 BPS 75 BPS 100 BPS Decrease in interest rates Increase in interest rates Unrealized gain (loss) . . . . . . . . . $1,151 $861 $572 $285 $(282) $(563) $(842) $(1,119) Equity Price Risk On August 1, 2011, we issued $100 million aggregate principal amount of 3.75% Convertible Notes. Upon conversion, we can settle the obligation by issuing our common stock, cash or a combination thereof at an initial conversion rate equal to 105.5548 shares of common stock per $1,000 principal amount of the 3.75% Convertible Notes, which is equivalent to a conversion price of approximately $9.47 per share of common stock, subject to adjustment. There is no equity price risk if the share price of our common stock is below $9.47 upon conversion of the 3.75% Convertible Notes. For every $1 that the share price of our common stock exceeds $9.47, we expect to issue an additional $10.6 million in cash or shares of our common stock, or a combination thereof, if all of the 3.75% Convertible Notes are converted. On April 24, 2014, we issued approximately $70.3 million aggregate principal amount of 3.50% Series A Convertible Notes. Upon conversion, we can settle the obligation by issuing our common stock, cash or a combination thereof at an initial conversion rate equal to 187.6877 shares of common stock per $1,000 principal amount of the 3.50% Series A Convertible Notes, which is equivalent to a conversion price of approximately $5.33 per share of common stock, subject to adjustment. There is no equity price risk if the share price of our common stock is below $5.33 upon conversion of the 3.50% Series A Convertible Notes. For every $1 that the share price of our common stock exceeds $5.33, we expect to issue an additional $13.2 million in cash or shares of our common stock, or a combination thereof, if all of the 3.50% Series A Convertible Notes are converted. 76 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ACCURAY INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 79 80 81 82 83 Page No. 77 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Accuray Incorporated We have audited the accompanying consolidated balance sheets of Accuray Incorporated (a Delaware Corporation) and subsidiaries (the ‘‘Company’’) as of June 30, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Accuray Incorporated and subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2014 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2014, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 29, 2014 expressed an unqualified opinion. /s/ GRANT THORNTON LLP San Francisco, California August 29, 2014 78 Accuray Incorporated Consolidated Balance Sheets (in thousands, except share and per share amounts) June 30, 2014 June 30, 2013 Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $976 and $2,160, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,346 79,553 1,492 $ 73,313 101,084 2,728 72,152 87,752 17,873 13,302 364,470 34,391 58,091 23,517 2,899 11,820 55,458 81,592 12,595 9,165 335,935 34,733 59,368 31,896 2,149 11,848 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 495,188 $ 475,929 Liabilities and stockholders’ equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,639 32,569 24,464 19,804 92,093 $ 15,920 12,461 22,893 17,692 86,893 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,569 155,859 Long-term liabilities: Long-term other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,593 9,866 195,612 396,640 5,382 9,085 198,768 369,094 Commitment and contingencies (Note 5) Stockholders’ Equity: Preferred stock, $0.001 par value; authorized: 5,000,000 shares; no shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, $0.001 par value; authorized: 200,000,000 shares as of June 30, 2014 and 2013 respectively; issued and outstanding: 77,178,365 and 74,587,231 shares at June 30, 2014 and 2013, respectively . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit — — 77 451,750 1,815 (355,094) 75 424,524 1,882 (319,646) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,548 106,835 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $ 495,188 $ 475,929 The accompanying notes are an integral part of these consolidated financial statements. 79 Accuray Incorporated Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share amounts) Years Ended June 30, 2014 2013 2012 Net revenue: Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $173,607 195,812 $ 137,403 178,571 $240,472 168,751 Total net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue: Cost of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369,419 315,974 409,223 97,592 129,027 226,619 142,800 53,724 61,885 45,335 85,498 132,836 218,334 97,640 66,197 54,372 57,726 136,180 135,771 271,951 137,272 81,287 54,547 57,672 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,944 178,295 193,506 Loss from operations Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,144) (14,216) (32,360) 3,088 (35,448) (80,655) (13,133) (93,788) 3,573 (56,234) (12,521) (68,755) 2,595 (97,361) (71,350) Loss from discontinued operations: Loss from operations of a discontinued variable interest entity . . . . . . . Impairment of indefinite lived intangible asset of discontinued variable interest entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from deconsolidation of a variable interest entity . . . . . . . . . . . . . Loss from discontinued operations, net of tax of $0 . . . . . . . . . . . . . . . . Loss from discontinued operations attributable to non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from discontinued operations attributable to stockholders . . . . . . . . — — — — — — (3,505) (7,103) (12,200) (3,442) (19,147) — — (7,103) (13,289) (6,411) (5,858) (692) Net loss attributable to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (35,448) $(103,219) $ (72,042) Loss per share attributable to stockholders Basic and diluted—continuing operations . . . . . . . . . . . . . . . . . . . . Basic and diluted—discontinued operations . . . . . . . . . . . . . . . . . . . Basic and diluted—net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ (0.47) $ — $ (0.47) $ (1.33) $ (0.08) $ (1.41) $ (1.01) (0.01) (1.02) Weighted average common shares used in computing loss per share Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,804 73,281 70,887 Net loss attributable to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . Defined benefit pension obligation . . . . . . . . . . . . . . . . . . . . . . . . . . $ (35,448) $(103,219) $ (72,042) 2,710 — — (498) (457) — 25 475 (567) Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (35,515) $(104,174) $ (69,332) The accompanying notes are an integral part of these consolidated financial statements. 80 Accuray Incorporated Consolidated Statement of Stockholders’ Equity (in thousands, except share amounts) Common Stock Additional Paid-in Amount Capital Shares Accumulated Other Total Non- Comprehensive Accumulated Stockholders’ controlling Income (Loss) Interest Deficit Equity Total Equity Balance at June 30, 2011 . . . . . . . . . . 70,059,819 $70 $373,963 $ 127 $(144,385) $ 229,775 $ 10,552 $ 240,327 Exercise of stock options, net . . . . . . . Issuance of common stock under employee stock purchase plan . . . . . Issuance of restricted stock . . . . . . . . Share-based compensation . . . . . . . . . Embedded conversion feature on Convertible Note . . . . . . . . . . . . . Change in non-controlling interest in CPAC . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment 746,441 755,532 302,476 — — — — — 1 1 — — — — — — 1,865 2,580 — 7,546 23,189 — — — — — — — — — — 2,710 — — — — — — (72,042) — 1,866 2,581 — 7,546 23,189 — (72,042) 2,710 — — — — — 1,866 2,581 — 7,546 23,189 4,101 (6,411) — 4,101 (78,453) 2,710 Balance at June 30, 2012 . . . . . . . . . . 71,864,268 $72 $409,143 $2,837 $(216,427) $ 195,625 $ 8,242 $ 203,867 Exercise of stock options, net . . . . . . . Issuance of common stock under employee stock purchase plan . . . . . Issuance of restricted stock . . . . . . . . Share-based compensation . . . . . . . . . Deconsolidation of CPAC . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . Unrealized loss on investments, net of 1,514,591 663,986 544,386 — — — — tax . . . . . . . . . . . . . . . . . . . . . . — 2 1 — — — — — — 4,199 3,256 — 8,236 (310) — — — — — — — — — (498) (457) — 4,201 — 4,201 — — — — (103,219) — 3,257 — 8,236 (310) (103,219) (498) (457) — — — 5,047 (13,289) — 3,257 — 8,236 4,737 (116,508) (498) (457) Balance at June 30, 2013 . . . . . . . . . . 74,587,231 $75 $424,524 $1,882 $(319,646) $ 106,835 $ — $ 106,835 Exercise of stock options, net . . . . . . . Issuance of restricted stock . . . . . . . . Issuance of common stock under employee stock purchase plan . . . . . Share-based compensation . . . . . . . . . Embedded conversion feature on Convertible Note (Note 13) . . . . . . . Unamortized Convertible Senior Note issuance costs reclassified to equity . . Tax withholding upon vesting of restricted stock awards . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment Unrealized gain on investments, net of tax . . . . . . . . . . . . . . . . . . . . . . Defined benefit pension obligation . . . . 1,061,513 913,070 650,315 — — — 1 1 — — — — (33,764) — — — — — — — — — 5,311 — 3,536 11,038 7,844 (243) (260) — — — — — — — — — — — — 25 475 (567) — — — — — — — (35,448) — — — 5,312 1 3,536 11,038 7,844 (243) (260) (35,448) 25 475 (567) — — — — — — — — — — — 5,312 1 3,536 11,038 7,844 (243) (260) (35,448) 25 475 (567) Balance at June 30, 2014 . . . . . . . . . . 77,178,365 $77 $451,750 $1,815 $(355,094) $ 98,548 $ — $ 98,548 The accompanying notes are an integral part of these consolidated financial statements. 81 Accuray Incorporated Consolidated Statements of Cash Flows (in thousands) Cash Flows From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from continuing operations Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of indefinite lived intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion/(amortization) of investment premiums/discounts . . . . . . . . . . . . . . . . . . Accretion of interest on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for write-down of inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on previously held equity interest in Morphormics . . . . . . . . . . . . . . . . . . . . . Loss from deconsolidation of a variable interest entity . . . . . . . . . . . . . . . . . . . . . . Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities: Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended June 30, 2014 2013 2012 $(35,448) $ (97,361) $ (71,350) (7,103) (19,147) — 20,564 — 11,313 1,408 1,584 5,105 (707) 2,836 666 — — 92 (163) (14,786) (8,341) (5,241) (4,875) (1,057) 21,696 1,744 3,956 25,564 12,200 8,216 784 295 4,302 787 5,255 1,013 (662) 3,442 947 (1,163) 10,858 (5,147) 4,382 (4,005) (1,140) (18,525) (659) 3,587 32,592 — 8,458 363 — 3,596 1,392 2,129 296 — — 495 1,605 (9,162) 11,927 2,523 2,080 (21,425) (10,538) (7,044) 20,887 Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . 346 (66,177) (38,279) Cash Flows From Investing Activities Purchases of property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,931) — (44,155) 64,578 — (15,126) (232) (102,403) — (3,861) (10,769) — — — (1,384) Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . 8,492 (121,622) (12,153) Cash Flows From Financing Activities Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments made to convertible note holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes paid related to net share settlement of equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from debt, net of costs Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . 9,054 (417) (260) — 8,377 1,818 Net increase (decrease) in cash and cash equivalent . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 19,033 73,313 7,455 — — 110,462 117,917 (309) (70,191) 143,504 4,449 — — 96,100 100,549 (2,519) 47,598 95,906 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,346 $ 73,313 $143,504 Supplemental Disclosure of Cash Flow Information Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for interest Non-cash financing activity: Exchange of Convertible Notes (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment recorded in accounts payable and accrued $ 2,499 $ 8,208 $ 7,844 liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,142 $ $ $ $ 2,000 3,750 $ $ 1,198 1,875 — $ — 366 $ 389 The accompanying notes are an integral part of these consolidated financial statements. 82 Accuray Incorporated Notes to Consolidated Financial Statements 1. Description of Business Organization Accuray Incorporated (together with its subsidiaries, the ‘‘Company’’ or ‘‘Accuray’’) is incorporated in Delaware. The Company designs, develops and sells advanced radiosurgery and radiation therapy systems for the treatment of tumors throughout the body. The Company conducts its business worldwide. The Company has its headquarters in Sunnyvale, California, with additional locations worldwide. 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and a variable interest entity, Compact Particle Acceleration Corporation, or CPAC until the deconsolidation of CPAC on December 21, 2012 (for further information, see Note 7, Investment in CPAC). All significant inter-company transactions and balances have been eliminated in consolidation. Discontinued Operations As a result of the deconsolidation of CPAC, the results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded for the years ended June 30, 2013 and 2012 have been presented as discontinued operations. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures at the date of the financial statements. Key estimates and assumptions made by the Company relate to revenue recognition, business combinations and assessment of recoverability of goodwill and intangible assets, valuation of inventories, share-based compensation expense, convertible notes, income taxes, allowance for doubtful accounts and loss contingencies. Actual results could differ materially from those estimates. Foreign Currency The Company’s international subsidiaries use their local currencies as their functional currencies. For those subsidiaries, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at the average exchange rate. Resulting translation adjustments are excluded from the determination of net income (loss) and are recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Net foreign currency exchange transaction gains or losses are included as a component of other income (expense), net, in the Company’s consolidated statements of operations and comprehensive loss. Fair Value Measurements The carrying values of the Company’s financial instruments including cash equivalents, restricted cash, accounts receivable and accounts payable are approximately equal to their respective fair values 83 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) due to the relatively short-term nature of these instruments. Also refer to Note 4, Financial Instruments, for further details. Cash and Cash Equivalents The Company considers currency on hand, demand deposits, time deposits, and all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Cash and cash equivalents are held in various financial institutions in the United States and internationally. Investments The Company classifies all its investments as available-for-sale at the time of purchase since it is management’s intent that these investments be available for current operations, and as such, includes these investments as short-term investments on its balance sheets. These investments consist of fixed-term deposits, commercial paper and investment-grade corporate debt securities with original maturities longer than three months. Short-term investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are recorded in the consolidated statements of operations and comprehensive loss based on specific identification. Concentration of Credit Risk and Other Risks and Uncertainties The Company’s cash and cash equivalents are mainly deposited with several major financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk on these balances. The Company has placed its investments with high-credit quality issuers. The Company does not invest an amount exceeding 5% of its combined cash, cash equivalents and investments in the securities of any one obligor or maker, except for obligations of the United States government, obligations of United States government agencies and money market accounts. There were no customers that represented 10% or more of total net revenue for the years ended June 30, 2014, 2013 and 2012. At June 30, 2014, one customer accounted for 13% of accounts receivable. At June 30, 2013, one customer accounted for 10% of accounts receivable. Accounts receivable are typically not collateralized. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts are charged against the allowance for doubtful accounts once collection efforts are unsuccessful. Historically, such losses have been within management’s expectations. Single-source suppliers presently provide the Company with several components. In most cases, if a supplier was unable to deliver these components, the Company believes that it would be able to find other sources for these components subject to any regulatory qualifications, if required. 84 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Restricted Cash Restricted cash primarily consists of certificates of deposit held as guarantees in connection with corporate leases as well as funds held as guarantees for Value-Added Tax, or VAT obligations in a foreign jurisdiction. Inventories Inventories are stated at the lower of cost (on a first-in, first-out basis) or market value. Excess and obsolete inventories are written down based on historical sales and forecasted demand, as judged by management. The Company determines inventory and product costs, which include allocated production overheads, through use of standard costs, which approximate actual costs. Revenue Recognition The Company’s revenue is primarily derived from sales of CyberKnife and TomoTherapy Systems and services, which include post-contract customer support or PCS, installation services, training and other professional services. The Company records its revenues net of any value added or sales tax. In all sales arrangements, the Company recognizes revenues when there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection of the fee is reasonably assured and delivery has occurred. Payments received in advance of system shipment are recorded as customer advances and are recognized as revenue or deferred revenue upon product shipment or installation. The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers. If the Company determines that collection is not probable, the Company will defer the fee and recognize revenue upon receipt of cash. The Company frequently enters into sales arrangements that contain multiple elements or deliverables. For sale arrangements that contain multiple elements, the Company allocates the arrangement consideration to each element based on the relative selling price method, whereby the relative selling price of each deliverable is determined using vendor specific objective evidence, or VSOE of fair value, if it exists. VSOE of fair value for each element is based on the Company’s standard rates charged for the product or service when such product or service is sold separately or based upon the price established by the Company’s pricing committee when that product or service is not yet being sold separately. When the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements, which may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history, the Company attempts to determine the selling price of each element based on third-party evidence of selling price, or TPE, as determined based on competitors’ prices for similar deliverables when sold separately. When the Company is not able to establish selling price using VSOE or TPE, the Company uses its best estimate of selling price, or BESP, in its allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin. The determination of BESP is made through consultation with the Company’s pricing committee, taking into consideration its overall go-to-market pricing strategy. 85 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) The Company has a limited number of software offerings which are not required to deliver its systems’ essential functionality and can be sold separately. The Company accounts for the separate sale of its software products in accordance with the applicable guidance for software revenue recognition. The Company’s multiple-element arrangements may also include software deliverables that are subject to the software revenue recognition guidance; and in these cases, the revenue for these multiple- element arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using VSOE, TPE or BESP. The Company regularly reviews VSOE, TPE and BESP for all of its products and services. As the Company’s go-to-market strategies and other factors change, the Company may modify its pricing practices in the future, which may impact the selling prices of systems and services as well as VSOE, TPE and BESP of systems and services. As a result, the Company’s future revenue recognition for multiple element arrangements could differ materially from that recorded in the current period. Product Revenue The majority of product revenue is generated from sales of CyberKnife and TomoTherapy systems. If the Company is responsible for installation, the Company recognizes revenue after installation and acceptance of the system. Otherwise, revenue is recognized upon delivery, assuming all other revenue recognition criteria are met. The Company could sell its systems with PCS contracts, installation services, training, and at times, professional services. PCS contracts provide planned and corrective maintenance services, software updates, bug fixes, as well as call-center support. The Company records revenues from sales of systems, product upgrades and accessories to distributors depending on the terms of the distribution agreement as well as terms and conditions executed for each sale, and once all revenue recognition criteria have been met. The Company’s agreements with customers and distributors for system sales generally do not contain product return rights. Certain distributor agreements include parts inventory buy-back provisions upon distributorship termination. The Company accrues an inventory buy-back liability when and if such distributorship termination is expected and the liability can be estimated. Service Revenue Service revenue is generated primarily from PCS (warranty period services and post warranty services), installation services, training, and professional services. PCS revenue is deferred and recognized over the service period. Installation service revenue is recognized concurrent with system revenue. Training revenues are recognized when services are performed, and professional service revenues that are not deemed essential to the functionality of the systems are recognized as such services are performed. Costs associated with service revenue are expensed when incurred, except when those costs are related to system upgrades where revenue recognition has been deferred. In those cases, the incremental costs are deferred and are recognized over the period of revenue recognition. 86 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Deferred Revenue and Deferred Cost of Revenue Deferred revenue consists of deferred product revenue and deferred service revenue. Deferred product revenue arises from timing differences between the shipment of product and satisfaction of all revenue recognition criteria consistent with the Company’s revenue recognition policy. Deferred service revenue results from the advance payment for services to be delivered over a period of time, usually one year. Deferred cost of revenue consists of the direct costs associated with the manufacturing of units and direct service costs for which the revenue has been deferred in accordance with the Company’s revenue recognition policies. Deferred revenue and associated deferred cost of revenue expected to be realized within one year are classified as current liabilities and current assets, respectively. Customer Advances Customer advances represent payments made by customers in advance of product shipment. Property and Equipment Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated on a straight-line basis over the remaining term of the lease or the estimated useful life of the asset, whichever is shorter. Machinery and equipment are depreciated over five years. Furniture and fixtures are depreciated over four years. Computer and office equipment and computer software are depreciated over three years. Repairs and maintenance costs, which are not considered improvements and do not extend the useful life of the property and equipment, are expensed as incurred. Software Capitalization Costs The Company capitalizes certain costs associated with obtaining or developing internal use software, including external direct costs of material and services. Software development costs relating to assets to be sold in the normal course of business are included in research and development and are expensed as incurred until technological feasibility is established. After technological feasibility is established, material software development costs are capitalized. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenue, whichever is greater. To date, the period between achieving technological feasibility, which the Company has defined as the establishment of a working model which typically occurs when the beta testing commences, and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Capitalized software costs are included in property, plant and equipment and amortized beginning when the software project is complete and the assets is ready for its intended use. Impairment of Long-Lived Assets The Company reviews long-lived assets, including intangible assets, property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable using pretax undiscounted cash flows. Impairment, if any, is measured as the amount by which the carrying value of a long-lived asset exceeds its fair value. 87 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Business Combinations The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development, or IPR&D, based on their estimated fair values. Goodwill represents the excess of acquisition cost over the fair value of tangible and identified intangible net assets of businesses acquired. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired company are reflected in the Company’s consolidated financial statements after the closing date of the merger or acquisition. Goodwill and Purchased Intangible Assets Goodwill is not amortized, but is evaluated for impairment on an annual basis and when impairment indicators are present. The Company has assessed that it has one operating segment and one reporting unit, and the consolidated net assets, including existing goodwill and other intangible assets, are considered to be the carrying value of the reporting unit. The Company estimates the fair value of the reporting unit based on the Company’s closing stock price on the trading day closest to the annual review date multiplied by the outstanding shares on that date. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required. There was no impairment of goodwill identified in the fiscal years ended June 30, 2014, 2013 and 2012. Purchased intangible assets other than goodwill, including developed technology, backlog and distributor license, are amortized on a straight-line basis over their estimated useful lives unless their lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets which range from approximately one to six years. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred. Shipping and Handling The Company’s billings for shipping and handling for product shipments to customers are included in cost of products. Shipping and handling costs incurred for inventory purchases are capitalized in inventory and expensed in cost of products. Advertising Expenses The Company expenses the costs of advertising and promoting its products and services as incurred. Advertising expenses were approximately $0.6 million, $0.7 million and $0.5 million for the years ended June 30, 2014, 2013 and 2012, respectively. 88 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Research and Development Costs Costs related to research, design and development of products are charged to research and development expense as incurred. These costs include direct salaries, benefits, and other headcount related costs for research and development personnel; costs for materials used in research and development activities; costs for outside services and allocated portions of facilities and other corporate costs. The Company has entered into research and clinical study arrangements with selected hospitals, cancer treatment centers, academic institutions and research institutions worldwide. These agreements support the Company’s internal research and development capabilities. Share-Based Compensation The Company issues stock-based compensation awards to employees and directors in the form of stock options, restricted stock units (‘‘RSUs’’), performance stock units (‘‘PSUs’’), market stock units (‘‘MSUs’’) and employee stock purchase plan (‘‘ESPP’’) awards (collectively, ‘‘awards’’). The Company measures and recognizes compensation expense for all stock-based awards based on the awards’ fair value. Share-based compensation for RSUs and PSUs is measured based on the value of the Company’s common stock on the grant date. The Company uses the Monte-Carlo simulation model to estimate the fair value of MSUs. Share-based compensation for employee stock options and ESPP awards are measured on the date of grant using a Black-Scholes option pricing model. Awards vest either on a graded schedule or in a lump sum. The Company determines the fair value of each award as a single award and recognizes the expense on a straight-line basis over the service period of the award, which is generally the vesting period. The exercise price of stock options granted is equal to the fair market value of the Company’s common stock on the date of grant. Stock options expire ten years from the date of grant. Share-based compensation expense for stock options, RSUs, PSUs and the ESPP is based on awards ultimately expected to vest, and the expense is recorded net of estimated forfeitures. The Company recognizes expense for MSUs net of estimated forfeitures and does not adjust the expense for subsequent changes in the expected outcome of the market-based vesting conditions. Loss Contingencies The Company is involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. The Company records a provision for a liability when it believes that it is both 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. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Net Loss Per Common Share Basic and diluted net loss per share is computed by dividing net loss attributable to stockholders by the weighted average number of common shares outstanding during the year. 89 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share attributable to stockholders follows (in thousands): Years ended June 30, 2014 2013 2012 Numerator: Loss from operations used in computing loss per share from continuing operations . . . . . . . . . . . $(35,448) $ (97,361) $(71,350) Loss from discontinued operations used in computing loss per share from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ (5,858) $ (692) Net loss used in computing net loss per share . . . . $(35,448) $(103,219) $(72,042) Denominator: Weighted average shares used in computing basic and diluted net loss per share . . . . . . . . . . . . . . 75,804 73,281 70,887 The potentially dilutive shares of the Company’s common stock resulting from the assumed exercise of outstanding stock options, the vesting of RSUs, MSUs and PSUs, and the purchase of shares under the ESPP, as determined under the treasury stock method, are excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive. The 3.75% Convertible Senior Notes due August 1, 2016 (the ‘‘3.75% Convertible Notes’’), the 3.50% Convertible Senior Notes due February 1, 2018 (the ‘‘3.50% Convertible Notes’’) and the 3.50% Series A Convertible Notes (the ‘‘3.50% Series A Convertible Notes’’) due February 1, 2018 are included in the calculation of diluted net income per share only if their inclusion is dilutive. For the years ended June 30, 2014, 2013 and 2012, the potentially dilutive shares under the Convertible Notes were excluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive. The following table sets forth all potentially dilutive securities excluded from the computation in the table above because their effect would have been anti-dilutive (in thousands): Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs, PSUs and MSUs . . . . . . . . . . . . . . . . . . . . . . . . . . 3.75% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% Series A Convertible Notes . . . . . . . . . . . . . . . . . . . As of June 30, 2014 2013 2012 3,209 3,947 — 8,378 4,985 4,844 3,387 — 21,576 — 7,873 2,097 — — — 20,519 29,807 9,970 Outstanding Convertibles Notes—Diluted Share Impact The 3.75% Convertible Notes and 3.50% Series A Convertible Notes have an optional physical (share), cash or combination settlement feature and contain certain conditional conversion features. Due to the optional cash settlement feature and management’s intent to settle the principal amount thereof in cash, the conversion shares underlying the outstanding principal amount of the 3.75% 90 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) Convertible Notes and 3.50% Series A Convertible Notes, totaling approximately 10.6 million shares and 13.2 million shares, respectively, were not included in the potentially diluted share count table above. The Company’s average stock price did not exceed the conversion price of the 3.75% Convertible Notes as of June 30, 2014, 2013 and 2012. The 5.0 million potentially dilutive shares of the 3.50% Series A Convertible Notes included in the table above represent the premium over the principal amount due to the higher average share price. The number of premium shares included in the Company’s diluted share count will vary with fluctuations in the Company’s share price. Higher actual share prices result in a greater number of premium shares. Income Taxes The Company is required to estimate its income taxes in each of the tax jurisdictions in which it operates prior to the completion and filing of tax returns for such periods. This process involves estimating actual current tax expense together with assessing temporary differences in the treatment of items for tax purposes versus financial accounting purposes that may create net deferred tax assets and liabilities. The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax bases of the Company’s assets and liabilities and their financial statement reported amounts. In addition, deferred tax assets are recorded for the future benefit of utilizing net operating losses, research and development credit carryforwards, and other deferred tax assets. The Company records a valuation allowance to reduce its deferred tax assets to the amount the Company believes is more likely than not to be realized. Because of the uncertainty of the realization of the deferred tax assets, the Company has recorded a full valuation allowance against its domestic and certain foreign net deferred tax assets. The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The Company anticipates that except for $0.3 million in uncertain tax positions that may be reduced related to the lapse of various statutes of limitation, there will be no material changes in uncertain tax positions in the next 12 months. Accumulated Other Comprehensive Income The components of comprehensive loss consist of net loss, unrealized gains and losses on available-for-sale investments, changes in foreign currency exchange rate translation and net changes related to defined benefit pension plan. The unrealized gains and losses on available-for-sale investments, changes in foreign currency exchange rate translation and net changes related to defined benefit pension plan are excluded from earnings and reported as a component of stockholders’ equity. The foreign currency translation adjustment results from those subsidiaries not using the United States dollar as their functional currency since the majority of their economic activities are primarily denominated in their applicable local currency. Accordingly, all assets and liabilities related to these operations are translated at the current exchange rates at the end of each period. The resulting cumulative translation adjustments are recorded directly to the accumulated other comprehensive loss account in stockholders’ equity. Revenues and expenses are translated at average exchange rates in effect during the period. 91 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) The components of accumulated other comprehensive income in the equity section of the balance sheets are as follows (in thousands): Net unrealized gain (loss) on short-term investments . . . . . . . . . . Cumulative foreign currency translation gain . . . . . . . . . . . . . . . . Change in defined benefit pension obligation . . . . . . . . . . . . . . . . $ 18 2,364 (567) $ (457) 2,339 — Accumulated other comprehensive income . . . . . . . . . . . . . . . . $1,815 $1,882 June 30, 2014 June 30, 2013 Segment Information The Company has determined that it operates in only one segment, as it only reports profit and loss information on an aggregate basis to its chief operating decision maker. Revenue by geographic region is based on the shipping addresses of the Company’s customers. The following summarizes revenue by geographic region (in thousands): Years ended June 30, 2014 2013 2012 Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe, Middle East, India and Africa . . . . . . . . . Asia (excluding Japan and India) . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $156,242 115,396 44,533 53,248 $143,613 101,172 37,829 33,360 $189,072 110,331 64,026 45,794 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $369,419 $315,974 $409,223 Information regarding geographic areas in which the Company has long lived tangible assets is as follows (in thousands): Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe, Middle East, India and Africa . . . . . . . . . . . . . . . . . . . Asia (excluding Japan and India) . . . . . . . . . . . . . . . . . . . . . . . Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,542 1,665 444 1,740 $31,797 1,431 498 1,007 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,391 $34,733 June 30, 2014 June 30, 2013 Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the 92 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 2. Summary of Significant Accounting Policies (Continued) revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company in its first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The Company is currently evaluating the impact of pending adoption of ASU 2014-09 on its consolidated financial statements. In July 2013, the Financial Accounting Standards Board (‘‘FASB’’) issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires that entities with an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset for the loss or tax credit carryforward rather than as a liability, when the uncertain tax position would reduce the loss or tax credit carryforward under the tax law, thereby eliminating diversity in practice regarding this presentation issue. This new guidance is effective prospectively for annual reporting periods beginning on or after December 15, 2013, although retrospective application is permitted. The Company is currently assessing the impact of this guidance, if any, on its consolidated financial statements. In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This new standard is intended to resolve diversity in practice regarding the release into net income of a cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. ASU No. 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company is currently reviewing this standard, but it does not anticipate that its adoption will have a material impact on the Company’s consolidated financial statements. 3. Balance Sheet Components Cash and Cash Equivalents The following is a summary of cash and cash equivalents (in thousands): Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $91,797 $60,082 — 12,758 473 549 $92,346 $73,313 June 30, 2014 June 30, 2013 93 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 3. Balance Sheet Components (Continued) Accounts receivable, net Accounts receivable, net consisted of the following (in thousands): Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unbilled fees and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,969 159 $56,830 788 Less: Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . 73,128 (976) 57,618 (2,160) Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,152 $55,458 June 30, 2014 June 30, 2013 The Company deducted $0.7 million and added $0.8 million, and wrote off $0.5 million and $0.3 million from the allowance for doubtful accounts in fiscal 2014 and 2013, respectively. Financing receivables A financing receivable is a contractual right to receive money, on demand or on fixed or determinable dates, that is recognized as an asset in the Company’s balance sheet. The Company’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year totaled $2.8 million and $2.9 million at June 30, 2014 and 2013, respectively and are included in Other Assets in the consolidated balance sheets. There was no balance in the allowance for doubtful accounts related to such financing receivables as of June 30, 2014 and June 30, 2013, respectively; revenue is recognized on a cash basis for these receivables. Inventories Inventories consisted of the following (in thousands): Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,003 17,692 33,057 $33,721 20,564 27,307 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $87,752 $81,592 June 30, 2014 June 30, 2013 94 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 3. Balance Sheet Components (Continued) Property and Equipment, net Property and equipment consisted of the following (in thousands): June 30, 2014 June 30, 2013 Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer and office equipment . . . . . . . . . . . . . . . . . . . . . . . Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Shared ownership systems . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,351 10,540 10,736 18,991 39,465 6,265 5,877 $ 6,506 9,481 9,586 19,199 37,371 4,979 3,084 Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . 97,225 (62,834) 90,206 (55,473) Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . $ 34,391 $ 34,733 Depreciation and amortization expense related to property and equipment for the years ended June 30, 2014, 2013 and 2012 was $12.2 million, $15.2 million and $16.4 million, respectively. 4. Financial Instruments The Company considers all highly liquid investments held at major banks, certificates of deposit and other securities with original maturities of three months or less to be cash equivalents. The Company classifies all of its investments as available-for-sale at the time of purchase because it is management’s intent that these investments are available for current operations and includes these investments on its balance sheets as short-term investments. Investments with original maturities longer than three months include commercial paper and investment-grade corporate debt securities. Investments classified as available-for-sale are recorded at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are recorded based on specific identification of each security’s cost basis. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels of inputs that may be used to measure fair value, as follows: Level 1—Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date. Level 2—Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including: (cid:127) Quoted prices for similar assets or liabilities in active markets; (cid:127) Quoted prices for identical or similar assets in non-active markets; 95 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 4. Financial Instruments (Continued) (cid:127) Inputs other than quoted prices that are observable for the asset or liability; and (cid:127) Inputs that are derived principally from or corroborated by other observable market data. Level 3—Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The following tables summarize the amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category for cash, cash equivalents and short-term investments (in thousands): June 30, 2014 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Cash and Cash Equivalents Short-term Investments Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,797 $— $ — $91,797 $ — Level 1 Money market funds . . . . . . . . . . . . . . 549 — — Level 2 Corporate notes . . . . . . . . . . . . . . . . . . 79,535 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,881 72 $72 (54) $(54) 549 — $92,346 — 79,553 $79,553 June 30, 2013 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Market Value Cash and Cash Equivalents Short-term Investments Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,082 $— $ — $60,082 $ — Level 1 Certificates of deposit . . . . . . . . . . . . . Money market funds . . . . . . . . . . . . . . Level 2 Commercial paper . . . . . . . . . . . . . . . . Corporate notes . . . . . . . . . . . . . . . . . . 15,365 473 15,838 3,993 94,941 98,934 — — — — — — — — — (1) (456) (457) 12,758 473 13,231 — — — 2,607 — 2,607 3,992 94,485 98,477 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,854 $— $(457) $73,313 $101,084 The Company’s Level 2 investments in the table above are classified as Level 2 items because quoted prices in an active market are not readily accessible for those specific financial assets, or the Company may have relied on alternative pricing methods that do not rely exclusively on quoted prices to determine the fair value of the investments. 96 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 4. Financial Instruments (Continued) The Company reviews its investments to identify and evaluate investments that have an indication of possible impairment and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the year ended June 30, 2014. Contractual maturities of available-for-sale securities at June 30, 2014 were as follows (in thousands): Due in 1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 1 - 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 2 - 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2014 Amortized Cost $28,663 25,049 25,823 Fair Value $28,678 25,050 25,825 $79,535 $79,553 The following table summarizes the carrying values and estimated fair values of the Company’s Convertible Notes (in thousands): 3.75% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . 3.50% Series A Convertible Notes . . . . . . . . . . . . . . . . . . June 30, 2014 June 30, 2013 Carrying Value $ 88,511 44,654 62,447 Fair Value $115,415 79,388 125,065 Carrying Value $ 83,768 115,000 — Fair Value $ 96,560 144,302 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $195,612 $319,868 $198,768 $240,862 The long-term debt is measured on a non-recurring basis using Level 2 inputs based upon observable inputs of the Company’s underlying stock price and the time value of the conversion option, since an observable quoted price of the Convertible Notes is not readily available. 5. Business Combinations Fiscal 2013 Acquisition On July 16, 2012, the Company acquired the remaining 90% of the outstanding shares of Morphormics, Inc., or Morphormics, a privately-held developer of medical imaging software based in North Carolina. This acquisition enables the Company to extend auto-contouring capabilities for both the CyberKnife and TomoTherapy systems to improve disease specific workflows. The Company previously held 10% of the outstanding shares of Morphormics, which had a carrying value of zero prior to the acquisition date and was valued at $0.7 million as of the acquisition date based on the fair value of the consideration paid. The acquisition was accounted for as a business combination, and accordingly, Morphormics’ results of operations were included in the consolidated financial statements from July 16, 2012. This transaction was not considered a material business combination, and Company did not incur significant severance or acquisition-related costs in connection with the transaction. 97 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 5. Business Combinations (Continued) The fair value of total purchase consideration paid and payable for 100% of Morphormics’ equity interest as of the acquisition date was as follows (in thousands): Cash paid and payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of pre-existing investment in Morphormics . . . . . . . . . . . . . . . . . $5,385 662 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,047 The total purchase price was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date as follows (in thousands): Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortizable intangible assets—developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 668 283 7 5,100 77 (88) Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,047 Pro forma results of operations for the acquisition have not been presented because they are not material to the Company’s consolidated statements of operations and comprehensive loss, balance sheets, or cash flows. 6. Goodwill and Purchased Intangible Assets Goodwill Goodwill as of June 30, 2014 and 2013 and changes in the carrying amount of goodwill for the respective periods are as follows (in thousands): Balance at the beginning of the period . . . . . . . . . . . . . . . . . . . Addition related to acquisition . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation and other adjustments . . . . . . . . . . . . . . . . $59,368 — (1,277) $59,215 77 76 Balance at the end of the period . . . . . . . . . . . . . . . . . . . . . . . . $58,091 $59,368 June 30, 2014 June 30, 2013 In connection with the acquisition of TomoTherapy in fiscal year 2011, the Company recognized liabilities related to unrecognized tax benefits as part of purchase accounting. During its first quarter of fiscal year 2014, the Company determined that certain of these liabilities related to unrecognized tax benefits were recorded in error. The Company evaluated the effects of this error on the financial statements and concluded that the error was not material to any prior annual or interim periods or the current period. In September of 2013, the Company reduced goodwill and accrued liabilities by $1.3 million to remove the liability recorded in error. 98 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 6. Goodwill and Purchased Intangible Assets (Continued) In fiscal 2014 the Company performed its annual goodwill impairment test. Based on this analysis, the Company determined that there was no impairment to goodwill. The Company will continue to monitor its recorded goodwill for indicators of impairment. Purchased Intangible Assets The Company’s intangible assets associated with completed acquisitions are as follows (in thousands): June 30, 2014 June 30, 2013 Gross Gross Useful Lives Carrying Accumulated Amount Amortization Amount Net Carrying Accumulated Amount Amortization Amount Net Developed technology . . . . . . . . . . Distributor license . . . . . . . . . . . . . 1.5 - 2.5 (in years) 5 - 6 $46,747 2,037 $(23,230) $23,517 $46,747 — 2,043 (2,037) $(15,276) $31,471 425 (1,618) $48,784 $(25,267) $23,517 $48,790 $(16,894) $31,896 During the year ended June 30, 2013, the Company recorded an impairment charge of approximately $12.2 million related to IPR&D technology due to a decrease in projected future usage of the technology. The Company did not identify any triggering events that would indicate potential impairment of its definite-lived intangible and long-lived assets as of June 30, 2014 and 2013. Amortization expense, excluding impairment charges related to purchased intangible assets was $8.4 million, $10.4 million and $16.2 million for the years ended June 30, 2014, 2013 and 2012, respectively. The estimated future amortization expense of purchased intangible assets as of June 30, 2014 is as follows (in thousands): Year Ending June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount $ 7,953 7,953 7,568 43 — $23,517 7. Investment in CPAC In April 2008, TomoTherapy established an affiliate, CPAC, to develop a compact proton therapy system for the treatment of cancer. Between the date of formation of CPAC through December 2012, the Company and TomoTherapy contributed both cash and intellectual property to CPAC, resulting in a combined equity interest of approximately 15.4% of the outstanding stock of CPAC and approximately 16.3% on a fully diluted basis. As of the Company’s acquisition of TomoTherapy on June 10, 2011, the 99 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 7. Investment in CPAC (Continued) Company determined that CPAC was a variable interest entity, as CPAC depended on the Company, TomoTherapy and other investors to fund its operations. Under the accounting standards for consolidating variable interest entities, the consolidating investor is the entity with the power to direct the activities of the venture that most significantly impact the venture’s economic performance and with the obligation to absorb losses or the right to receive benefits from the venture that could potentially be significant to the venture. Although the Company and its subsidiary held less than a 50% ownership interest in CPAC, it was determined that the Company met these two characteristics, and therefore, was the primary beneficiary of CPAC. The Company consolidated the results of operations of CPAC from June 10, 2011 to December 21, 2012. On December 21, 2012, the Company and CPAC entered into a Purchase Agreement and Release, or Purchase Agreement, which provided for all the equity and debt investments held by the Company in CPAC to be purchased by CPAC for a nominal consideration. In addition, the Company assigned all its rights to the Dielectric Wall Accelerator, or DWA technology licensed from Lawrence Livermore National Security, LLC to CPAC. As a result of the Purchase Agreement, the Company concluded that it was no longer the primary beneficiary of CPAC since it did not have any variable interest in CPAC. In the second quarter of fiscal 2013, the Company deconsolidated CPAC and recorded a loss of $3.4 million, resulting from the write-down of the carrying value of CPAC’s net liabilities, the write-off of receivables from CPAC and the non-controlling interest in CPAC, net of cash consideration received. The results of operations of CPAC, including the loss on deconsolidation of CPAC and the losses attributable to the non-controlling interest recorded for the years ended June 30, 2013 and 2012 have been presented as discontinued operations in the consolidated statements of operations and comprehensive loss. 8. Commitments and Contingencies Operating Lease Agreements and Long-term Debt The Company leases office and manufacturing space under non-cancelable operating leases with various expiration dates through December 2023. Rent expense was $6.5 million, $8.7 million and $7.1 million for the years ended June 30, 2014, 2013 and 2012, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. The Company is required to make semi-annual interest payments on the Convertible Notes. See Note 13, Debt, for details. 100 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 8. Commitments and Contingencies (Continued) Future minimum lease payments under non-cancelable operating lease agreements and long-term principal and interest on the Convertible Notes as of June 30, 2014 are as follows (in thousands): Year Ending June 30, Operating Leases Long-term Debt(1) 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,427 8,205 8,295 7,931 4,818 17,969 $ 7,775 7,775 104,338 117,348 — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,645 $237,236 (1) These amounts represent principal and interest cash payments over the contractual life of the debt obligations, including anticipated interest payments that are not recorded on the Company’s consolidated balance sheet. Any conversion, redemption or purchase of Convertible Notes would impact cash payments noted in the preceding table. The Company enters into standard indemnification agreements with its landlords and all superior mortgagees and their respective directors, officers’ agents, and employees in the ordinary course of business. Pursuant to these agreements, the Company will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the landlords, in connection with any loss, accident, injury, or damage by any third party with respect to the leased facilities. The term of these indemnification agreements is from the commencement of the lease agreements until termination of the lease agreements. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, historically the Company has not incurred claims or costs to defend lawsuits or settle claims related to these indemnification agreements. The Company has recorded no liability associated with its indemnification agreements as it is not aware of any pending or threatened actions that represent probable losses as of June 30, 2014. Royalty Agreement The Company has an exclusive license agreement with the Wisconsin Alumni Research Foundation, or WARF, to make, use, sell and otherwise distribute products under certain of WARF’s patents anywhere in the world. The Company is required to pay WARF a royalty for each TomoTherapy System sold that includes the licensed technology. The license agreement expires upon expiration of the patents and may be terminated earlier if the Company so elects. WARF has the right to terminate the license agreement if the Company does not meet the minimum royalty obligation of $0.3 million per year, or if the Company commits any breach of the license agreement’s covenants. The Company recorded royalty costs of $0.7 million, $0.6 million and $1.0 million for the years ended June 30, 2014, 2013 and 2012, respectively, which were recorded in cost of revenue or deferred cost of revenue. The Company had accrued liabilities of approximately $0.1 million at June 30, 2014 and 2013 related to this agreement. 101 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 8. Commitments and Contingencies (Continued) Software License Indemnity Under the terms of the Company’s software license agreements with its customers, the Company agrees that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of a third party, it will indemnify its customer licensees against any loss, expense, or liability from any damages that may be awarded against its customer. The Company includes this infringement indemnification in all of its software license agreements and selected managed services arrangements. In the event the customer cannot use the software or service due to infringement and the Company cannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then the Company may terminate the license and provide the customer a refund of the fees paid by the customer for the infringing license or service. The Company has not recorded any liability associated with this indemnification, as it is not aware of any pending or threatened actions that represent probable losses as of June 30, 2014. Litigation From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. Currently, management believes the Company does not have any probable and estimable losses related to any current legal proceedings and claims that would individually or in the aggregate materially adversely affect its financial condition or operating results. For certain legal proceedings, management believes that there is a reasonable possibility that losses may be incurred. Management currently estimates a range of loss (in excess of amounts accrued) between zero and $0.5 million in the aggregate for such legal proceedings, where it is possible to make such estimates. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters that could have a material impact on its results of operations, financial position and cash flows. Best Medical Trade Secret Litigation On September 3, 2009, Best Medical International, Inc., or Best Medical, filed a lawsuit against the Company in the U.S. District Court for the Western District of Pennsylvania, claiming that the Company induced certain individuals to leave the employment of Best Medical and join the Company in order to gain access to Best Medical’s confidential information and trade secrets. Best Medical is seeking monetary damages and other relief. On October 25, 2011, the court presiding over the case granted summary judgment in favor of the Company on all counts. On November 21, 2011, Best Medical filed a notice of appeal. On December 22, 2011, the court awarded attorney fees and costs to the Company and ordered the Company to file an accounting of its fees and costs. Following the filing of the accounting of the Company’s fees and costs, the magistrate judge presiding over the case issued a report on the Company’s accounting and recommended an award to the Company in the amount of $0.5 million in attorney fees and costs, which was adopted in its entirety by the District Court on September 27, 2013. On July 3, 2013, the Court of Appeals for the Third Circuit issued a briefing schedule for the appeal of this case. Best Medical’s brief was filed on September 16, 2013 and the Company’s brief was filed on December 30, 2013. Best Medical filed its reply brief on January 10, 2014. The parties reached a settlement effective June 9, 2014. The case, including the related appeals, was dismissed with prejudice on June 26, 2014. 102 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 8. Commitments and Contingencies (Continued) Best Medical Patent Litigation On August 6, 2010, Best Medical filed an additional lawsuit against the Company in the U.S. District Court for the Western District of Pennsylvania, claiming that the Company has infringed U.S. Patent No. 5,596,619, a patent that Best Medical alleges protects a method and apparatus for conformal radiation therapy. In December 2010, Best Medical amended its complaint by claiming that the Company also infringed U.S. Patent Nos. 6,038,283 and 7,266,175, both of which Best Medical alleges cover methods and apparatus for conformal radiation therapy. In March 2011, the court dismissed with prejudice all counts against the Company, except for two counts of alleged willful infringement of two of the patents. Following several procedural rulings by the court, Best Medical moved to voluntarily dismiss one of the two remaining patent claims on June 28, 2011, which the court granted on June 30, 2011, leaving only one patent (U.S. Patent No. 6,038,283) at issue in the case. The parties failed to a reach settlement during mandatory settlement conferences held in March 2013, May 2013 and April 2014. Best Medical was seeking declaratory and injunctive relief, as well as unspecified compensatory and treble damages and other relief. The parties reached a settlement effective June 9, 2014. The case was dismissed with prejudice on June 26, 2014. Rotary Systems On April 28, 2011, a former supplier to TomoTherapy, Rotary Systems Incorporated, filed suit in Minnesota state court, Tenth Judicial District, Anoka County, against TomoTherapy alleging misappropriation of trade secrets, as well as several other counts alleging various theories of injury. Rotary Systems alleges TomoTherapy misappropriated Rotary Systems’ trade secrets pertaining to a component previously purchased from Rotary Systems, which component TomoTherapy now purchases from a different supplier. The suit alleges TomoTherapy improperly supplied the alleged trade secrets to its present supplier, Dynamic Sealing Technologies Inc. (also a named defendant in the suit). Rotary Systems has made an unspecified claim for damages of greater than $50,000. TomoTherapy moved to dismiss the case on May 19, 2011, and on August 29, 2011, the court granted the motion to dismiss with respect to all counts other than the count alleging misappropriation of trade secrets. On May 21, 2012, the court granted the Company’s motion for sanctions, in part, and gave Rotary Systems sixty days to identify the alleged trade secrets with specificity or face dismissal of its claim with prejudice. The court held a hearing on September 20, 2012 to review Rotary Systems’ amended complaint and set a calendar for discovery. The court ruled on the amended complaint, and the parties have started discovery, which was originally expected to be completed by October 2013. The parties jointly asked the court to extend discovery until February 2014. The Company filed a motion for summary judgment and, on September 11, 2013, the court held a hearing on the Company’s motion for summary judgment and to stay discovery pending the ruling on the summary judgment motion. On December 5, 2013, the court ruled in favor of the Company. Rotary Systems filed its notice of appeal on January 29, 2014. On April 14, 2014, Rotary Systems filed its appellant brief with the court. On June 2, 2014, the Company filed its response brief, and on June 27, 2014, Rotary Systems filed its reply brief with the court. The parties are awaiting a hearing date from the court for oral arguments. The Company anticipates that the argument will be heard in the fall of 2014. Sarif Biomedical Patent Litigation On January 28, 2013, Sarif Biomedical filed a patent infringement complaint against the Company in the U.S. District Court for the District of Delaware. The complaint alleges the Company’s 103 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 8. Commitments and Contingencies (Continued) CyberKnife System directly infringes U.S. Patent No. 5,755,725 and seeks unspecified monetary damages for the alleged infringement. Accuray filed an answer to the complaint in March 2013. The parties have exchanged initial discovery requests and responses. The court issued a scheduling order on April 29, 2014. Accuray made its first document production on May 30, 2014. Discovery closes on May 5, 2015, and trial is set for April 11, 2016. Cowealth Medical On February 27, 2014, Cowealth Medical Holding Co., Ltd. (‘‘Cowealth’’), Accuray’s former distributor in China, submitted a request for arbitration with the International Chamber of Commerce International Court of Arbitration (‘‘ICC’’) alleging, among other matters, that Accuray breached its distributor agreement with Cowealth by wrongfully terminating Cowealth as its distributor and misappropriated certain of Cowealth’s confidential information. Cowealth is seeking damages and injunctive relief. Accuray’s answer and counterclaim were submitted to the ICC on May 12, 2014, and Cowealth served its reply on June 27, 2014. A hearing has been set for January 27, 2015. 9. Stockholders’ Equity In fiscal 2012, the Company retired 2,140,018 shares of its common stock that were repurchased in prior years and accounted for as treasury stock. The Company did not have an active stock repurchase program at June 30, 2014. At June 30, 2014, the Company had 13.2 million and 21.6 million shares of common stock reserved for future issuance to the holders of the 3.75% Convertible Senior Notes and 3.50% Convertible Senior Notes (including Series A Convertible Senior Notes), respectively, and had 13.8 million shares of common stock reserved for issuance under the stock incentive plans and the employee stock purchase plan. 10. Stock Incentive Plan and Employee Stock Purchase Plan As of June 30, 2014, the Company had two outstanding stock incentive plans: the 2007 Stock Incentive Plan, or the 2007 Plan; and the 1998 Stock Incentive Plan, or the1998 Plan. The 2007 Plan permits the granting of stock options, restricted stock awards, or RSAs and restricted stock units, or RSUs. The vesting of RSUs under the 2007 Plan may be time-based (over the requisite service period), performance-based, or PSUs or market-based, or MSUs. Only employees of the Company are eligible to receive incentive stock options. Non-employees may be granted non-qualified options. Stock options granted under the 2007 Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and no less than 85% of the fair value for non-qualified stock options. The stock options have 10 year contractual terms and generally become exercisable for 25% of the option shares one year from the date of grant and then ratably over the following 36 months. Time-based RSUs generally vest 25% of the share units covered by the grant on each of the first through fourth anniversaries of the date of the grant. However, certain of the outstanding RSUs vest 50% upon the first anniversary year of the grant date, and 50% upon the second anniversary year of the grant date. The Board of Directors has the discretion to use different vesting schedules. 104 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 10. Stock Incentive Plan and Employee Stock Purchase Plan (Continued) As of June 30, 2014, the 1998 Plan continued to remain in effect; however, the Company can no longer make equity awards under the plan. The following table summarizes the share-based compensation charges included in the Company’s consolidated statements of operations and comprehensive loss (in thousands): Years ended June 30, 2014 2013 2012 Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . Selling and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . $ 1,912 2,585 2,059 4,757 $1,498 1,949 1,121 3,648 $1,672 2,340 729 3,717 $11,313 $8,216 $8,458 For the years ended June 30, 2014, 2013 and 2012, the Company capitalized share-based compensation costs of $0.5 million, $0.6 million and $0.4 million, respectively, as components of inventory. Stock Options The Company did not grant any stock options in the year ended June 30, 2014. The Company used the Black-Scholes option pricing model to measure the fair value of stock options grants. During the years ended June 30, 2013 and 2012, the following weighted average assumptions were used: Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . 0.87% - 1.15% 0.85% - 1.72% — 6.25 — 6.25 52.7% - 63.2% 52.0% - 52.9% Years Ended June 30, 2013 2012 105 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 10. Stock Incentive Plan and Employee Stock Purchase Plan (Continued) A summary of option activity under the Company’s Incentive Plan during the fiscal years is presented below (in thousands, except per share and term amounts): Options Outstanding Weighted Average Exercise Price Balance at June 30, 2011 . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . Options forfeited/expired . . . . . . . . . . . . . . . Balance at June 30, 2012 . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . Options forfeited/expired . . . . . . . . . . . . . . . Balance at June 30, 2013 . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . Options forfeited/expired . . . . . . . . . . . . . . . Balance at June 30, 2014 . . . . . . . . . . . . . . . . . Vested or Expected to vest at June 30, 2014 . . . Exercisable at June 30, 2014 . . . . . . . . . . . . . . 8,336 1,399 (746) (1,116) 7,873 1,250 (1,515) (2,764) 4,844 — (1,062) (573) 3,209 3,209 2,470 $7.39 $4.53 $2.50 $9.79 $7.00 $6.54 $2.77 $8.86 $7.15 $ — $5.01 $9.49 $7.44 $7.44 $7.87 Weighted Average Remaining Contractual Life (In Years) Aggregate Intrinsic Value (in thousands) 5.13 $19,131 5.57 $12,359 6.17 $ 2,771 5.38 5.38 4.58 $ 8,251 $ 8,251 $ 6,191 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the fair value of the Company’s common stock on June 30, 2014 of $8.80 and the exercise price of the options) that would have been received by option holders if all options exercisable had been exercised on June 30, 2014. The total intrinsic value of options exercised in the years ended June 30, 2014, 2013, and 2012 was approximately $3.8 million, $4.5 million and $2.9 million, respectively. During the years ended June 30, 2014, 2013 and 2012, the Company recognized $1.7 million, $2.9 million and $3.5 million, respectively, of share-based compensation expense for stock options granted to employees. The weighted average fair value of options granted was $3.48 and $2.30 per share for the years ended June 30, 2013 and 2012. Tax benefits from tax deductions for exercised options and disqualifying dispositions in excess of the deferred tax asset attributable to stock compensation costs for such options are credited to additional paid-in capital. Realized excess tax benefits related to stock options exercises was zero for each of the years ended June 30, 2014, 2013 and 2012. As of June 30, 2014, there was approximately $2.2 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted average period of 2.08 years. 106 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 10. Stock Incentive Plan and Employee Stock Purchase Plan (Continued) The following table summarizes information about outstanding and exercisable options at June 30, 2014 (in thousands, except years and exercise prices): Options Outstanding Weighted Average Remaining Contractual Life (Years) Number Outstanding Options Exercisable Weighted Average Number Exercise Price Outstanding Weighted Average Exercise Price Exercice Prices $3.50 - 4.01 . . . . . . . . . . . . . $4.23 - 5.68 . . . . . . . . . . . . . $5.74 - 6.28 . . . . . . . . . . . . . $6.31 - 6.58 . . . . . . . . . . . . . $6.63 - 6.90 . . . . . . . . . . . . . $6.96 . . . . . . . . . . . . . . . . . $7.06 - 10.36 . . . . . . . . . . . . $13.05 - 18.40 . . . . . . . . . . . $22.70 . . . . . . . . . . . . . . . . . $28.47 . . . . . . . . . . . . . . . . . 611 477 518 397 111 422 359 196 3 115 Total Outstanding . . . . . . . . 3,209 Restricted Stock 4.73 4.96 6.97 4.66 5.59 8.15 4.42 3.14 1.86 2.61 5.38 $ 3.81 5.20 6.14 6.47 6.67 6.96 8.82 16.00 22.70 28.47 $ 7.44 474 402 326 359 105 174 316 196 3 115 2,470 $ 3.75 5.28 6.07 6.47 6.67 6.96 9.00 16.00 22.70 28.47 $ 7.87 The following table summarizes the activity of RSUs, PSUs and MSUs: Unvested Restricted Stock Unvested at June 30, 2011 . . . Granted . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . Cancelled/Forfeited . . . . . . Unvested at June 30, 2012 . . . Granted . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . Cancelled/Forfeited . . . . . . Unvested at June 30, 2013 . . . Granted . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . Cancelled/Forfeited . . . . . . Unvested at June 30, 2014 . . . Restricted Stock Units (000’s) Performance Stock Units (000’s) Market Stock Units (000’s) Total Number of Shares Underlying Stock Awards (000’s) Weighted Average Grant Date Fair Value Per Share 658 1,047 (302) (193) 1,210 2,200 (526) (460) 2,424 2,125 (888) (545) 3,116 — 954 — (66) 888 36 (18) (350) 556 70 (25) (576) 25 — — — — — 426 — (19) 407 735 — (336) 806 658 2,001 (302) (259) 2,098 2,662 (544) (829) 3,387 2,930 (913) (1,457) 3,947 $6.97 4.53 4.47 5.67 5.16 5.52 5.18 5.18 5.66 7.28 8.70 5.44 $6.24 As of June 30, 2014, there was approximately $17.2 million of unrecognized compensation cost, net of estimated forfeitures, related to restricted stock, which is expected to be recognized over a weighted average period of 2.44 years. 107 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 10. Stock Incentive Plan and Employee Stock Purchase Plan (Continued) Restricted Stock Units The Company recognized $6.4 million, $3.6 million and $2.5 million of share-based compensation expense, net of estimated forfeitures, related to RSUs during the years ended June 30, 2014, 2013 and 2012. The weighted average grant date fair value per share of RSUs was $7.32, $5.89 and $4.80 for the years ended June 30, 2014, 2013 and 2012, respectively. As of June 30, 2014, there was approximately $14.1 million of unrecognized compensation cost, net of estimated forfeitures, related to RSUs. The aggregate fair market value of RSUs that vested during the year ended June 30, 2014 was $7.7 million. The Company recognized $0.3 million and $1.4 million of share-based compensation expense during the years ended June 30, 2013 and 2012, respectively, related to RSAs assumed in connection with the acquisition of TomoTherapy. The expense recognized in fiscal 2014 was immaterial. Performance Stock Units During fiscal 2012, the Compensation Committee approved the grant of 1.0 million PSUs to certain employees of the Company. The PSUs were cancelled in fiscal 2014 as it was determined that the Company did not achieve the requisite performance targets. The Company recognized $0.1 million of share-based compensation expense, net of estimated forfeitures, related to PSUs during the year ended June 30, 2014. The expense recognized during the year ended June 30, 2013 was immaterial. Market Stock Units The Compensation committee approved the performance equity program, referred to as the market stock unit program, or MSU program, in October 2012. The Company’s MSU Program uses the Russell 2000 index as a performance benchmark and requires that the Company’s total stockholder return match or exceed that of the Russell 2000. Based on a sliding scale of how much the Company’s total stockholder return outperforms the Russell 2000 benchmark, the participating executives can earn up to a maximum of 150% of the target number of shares over two measurement periods. The Company uses a Monte-Carlo simulation to calculate the fair value of the award on the grant date. The Company recognized $1.8 million and $0.3 million of share-based compensation expense, net of estimated forfeitures, related to MSUs during the years ended June 30, 2014 and 2013. The weighted average grant date fair value per share of MSUs was $7.18 and $5.39 for the years ended June 30, 2014 and 2013, respectively. As of June 30, 2014, there was approximately $3.1 million of unrecognized compensation cost, net of estimated forfeitures, related to MSUs. There were no vested MSUs and 0.2 million of MSUs were cancelled in fiscal 2014 as the performance targets were not achieved for the first measurement period. Assuming 100% performance target will be achieved, 0.5 million and 0.3 million of MSUs will vest by the end of fiscal 2015 and 2016, respectively. Employee Stock Purchase Plan Under the Company’s 2007 Employee Stock Purchase Plan, or ESPP, qualified employees are permitted to purchase the Company’s common stock at 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or the fair market value on the specified purchase date. The ESPP is deemed compensatory and compensation costs are accounted for under ASC 718, Stock Compensation. Employees’ payroll deductions may not exceed 10% of their 108 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 10. Stock Incentive Plan and Employee Stock Purchase Plan (Continued) salaries. Employees may purchase up to 2,500 shares per period provided that the value of the shares purchased in any calendar year may not exceed $25,000, as calculated pursuant to the purchase plan. The Company estimates the fair value of ESPP shares at the date of grant using the Black-Scholes option pricing model. The weighted average assumptions were as follows: Years Ended June 30, 2014 2013 2012 Risk-free interest rate . . . . . . . . Dividend yield . . . . . . . . . . . . . . Expected life . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . 0.06% - 0.13% 0.07% - 0.14% 0.05% - 0.12% — 0.50 27.5% - 46.5% 40.3% - 53.7% 33.6% - 50.6% — 0.5 - 1.0 — 0.50 The risk-free rate for the expected term of the ESPP option was based on the U.S. Treasury Constant Maturity rate for each offering period; expected volatility was based on the historical volatility of the Company’s common stock; and the expected term was based upon the offering period of the ESPP. For the years ended June 30, 2014, 2013 and 2012, the Company recognized $1.3 million, $1.3 million and $1.1 million, respectively, of compensation expense related to its ESPP. The Company issued 0.7 million shares under the ESPP in fiscal 2014 and 2013, respectively, at a weighted average price per share of $5.44 and $4.89, respectively. As of June 30, 2014, total unrecognized compensation cost related to the ESPP plan was $0.7 million, which the Company expects to recognize over a weighted average period of 0.6 years. 11. Income Taxes Loss before provision for income taxes on the accompanying statements of operations and comprehensive loss included the following components (in thousands): Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(42,485) $(103,964) $(75,391) 6,636 10,176 10,125 Total worldwide . . . . . . . . . . . . . . . . . . . . . . . . $(32,360) $ (93,788) $(68,755) Years Ended June 30, 2014 2013 2012 109 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 11. Income Taxes (Continued) The provision for income taxes consisted of the following (in thousands): Years Ended June 30, 2014 2013 2012 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — (7) 2,107 (21) 2,647 78 2,918 Total current Deferred: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,996 2,626 2,100 Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 92 92 — — 947 947 — — 495 495 Total provision for income taxes . . . . . . . . . . . . . . . . . . . $3,088 $3,573 $2,595 Income tax payable was $2.0 million and $1.2 million at June 30, 2014 and 2013, respectively. A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of operations and comprehensive loss is as follows (in thousands): Years Ended June 30, 2014 2013 2012 U.S. federal taxes (benefit): At federal statutory rate . . . . . . . . . . . . . . . . . . . State tax, net of federal benefit . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $(11,326) $(32,826) $(24,064) (7) 3,645 24,796 (846) (1,245) 316 78 332 13,997 (114) 640 (519) (21) 4,061 33,454 (1,272) 69 108 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,088 $ 3,573 $ 2,595 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax 110 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 11. Income Taxes (Continued) purposes. Significant components of the Company’s net deferred tax assets were as follows (in thousands): June 30, 2014 2013 Deferred tax assets: Federal and state net operating losses . . . . . . . . . . . . . . . Accrued expenses and reserves . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . . . . . . . Unicap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,734 6,410 1,217 16,686 5,391 1,710 904 $ 105,110 7,021 1,913 16,636 10,691 1,540 623 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . 149,052 143,534 Deferred tax liabilities: Debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets/intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency differences . . . . . . . . . . . . . . . . . . . . . . (7,087) (8,268) (7) (4,884) (11,740) (1,697) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,362) (133,039) (18,321) (124,781) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 651 $ 432 The Company has not provided for U.S. income taxes on undistributed earnings of its foreign subsidiaries because it intends to permanently re-invest these earnings outside the U.S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided as of June 30, 2014 was $14.7 million. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be repatriated to the U.S. As of June 30, 2014 the Company had approximately $320.5 million and $166.8 million in federal and state net operating loss carryforwards, respectively. The federal and state carryforwards expire in varying amounts beginning in 2019 for federal and 2015 for state purposes. Such net operating loss carryforwards include excess tax benefits from employee stock option exercises which, in accordance with guidance for income tax accounting, have not been recorded within the Company’s deferred tax asset balances. The Company will record approximately $3.9 million as a credit to additional paid-in capital as and when such excess benefits are ultimately realized. In addition, as of June 30, 2014, the Company had federal and state research and development tax credits of approximately $16.1 million and $15.7 million, respectively. The federal research credits will begin to expire in 2019, the California research credits have no expiration date, and the other state research credits began to expire in 2015. Utilization of the Company’s net operating loss and credit carryforwards is subject to annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. The acquisition of TomoTherapy and the resulting Section 382 111 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 11. Income Taxes (Continued) limitation should not result in the expiration of net operating losses or credits due to the Section 382 limitation. Based on the available objective evidence and history of losses, the Company has established a 100% valuation allowance against the combined domestic net deferred tax assets of Accuray and TomoTherapy due to uncertainty surrounding the realization of such deferred tax assets. The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands): Balance at beginning of year . . . . . . . . . . . . . . . . . . . Tax positions related to current year: Years Ended June 30, 2014 2013 2012 $16,749 $15,147 $14,158 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,489 1,781 1,129 Tax positions related to prior years: Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions — (1,069) 564 (743) 40 (180) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . $17,169 $16,749 $15,147 The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in respect to legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. The reduction in prior years tax positions primarily relates to lapses of applicable statutes of limitations. The Company anticipates that except for $0.3 million in uncertain tax positions that may be reduced related to the lapse of various statutes of limitation, there will be no material changes in uncertain tax positions in the next 12 months. As of June 30, 2014, the amount of gross unrecognized tax benefits was $17.2 million of which $10.2 million would affect the Company’s effective tax rate if realized. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2014 and 2013, the Company had approximately $0.7 million of accrued interest and penalties related to uncertain tax positions. The Company files income tax returns in the United States federal, various states and foreign jurisdictions. Due to attributes being carried forward and utilized during open years, the statute of limitations remains open for the U.S. federal jurisdiction and domestic states for tax years from 1999 and forward. The material foreign jurisdictions are France, Switzerland, and Japan, whose tax years remain open from 2011, 2006, and 2006, respectively. The Company is also subject to periodic examination of its income tax returns by the Internal Revenue Service (IRS) and other tax authorities, and in some cases the Company has received additional tax assessments which have not been significant. Currently, the Company is under audit by the German tax authorities which is in the early stages of the audit. 112 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 12. Other Income (Expense), Net Other income (expense), net consisted of the following (in thousands): Interest expense on convertible notes . . . . . . . . . . . Foreign currrency transaction loss . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(14,287) $(10,378) $ (7,397) (4,386) (2,503) (738) (252) (91) 162 Total other expense, net . . . . . . . . . . . . . . . . . . . $(14,216) $(13,133) $(12,521) Years Ended June 30, 2014 2013 2012 13. Debt 3.75% Convertible Senior Notes due August 2016 On August 1, 2011, the Company issued the 3.75% Convertible Notes to certain qualified institutional buyers or QIBs. The Securities were offered and sold to the QIBs pursuant to Rule 144A under the Securities Act of 1933, as amended or Rule 144A. The net proceeds from the $100 million offering, after deducting the initial purchaser’s discount and commission and the related offering costs, were approximately $96.1 million. The offering costs and the initial purchaser’s discount and commission (which are recorded in Other Assets) are both being amortized to interest expense using the effective interest method over five years. The 3.75% Convertible Notes bear interest at a rate of 3.75% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year, beginning on February 1, 2012. The 3.75% Convertible Notes will mature on August 1, 2016, unless earlier repurchased, redeemed or converted. The 3.75% Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the Securities may convert their 3.75% Convertible Notes at any time on or after May 1, 2016 until the close of business on the business day immediately preceding the maturity date. Prior to May 1, 2016, holders of the Securities may convert their 3.75% Convertible Notes only under the following circumstances: (1) during any calendar quarter after the calendar quarter ending September 30, 2011, and only during such calendar quarter, if the closing sale price of the Company’s common stock for each of 20 or more trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading-day period (such five consecutive trading-day period, the ‘‘Note Measurement Period’’) in which the trading price per $1,000 principal amount of 3.75% Convertible Notes for each trading day of that Note Measurement Period was equal to or less than 98% of the product of the closing sale price of shares of the Company’s common stock and the applicable conversion rate for such trading day; (3) if the Company calls any or all of the 3.75% Convertible Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate transactions as described in the Indenture. Upon conversion by holders of the 3.75% Convertible Notes, the Company will have the right to pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof, at the Company’s election. At any time on or prior to the 33rd business day immediately preceding the maturity date, the Company may irrevocably elect to (a) deliver solely shares of common stock of the Company in respect of the Company’s conversion obligation or (b) pay cash up to the aggregate 113 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 13. Debt (Continued) principal amount of the 3.75% Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the 3.75% Convertible Notes being converted. The initial conversion rate is 105.5548 shares of the Company’s common stock per $1,000 principal amount of 3.75% Convertible Notes (which represents an initial conversion price of approximately $9.47 per share of the Company’s common stock). The conversion rate, and thus the conversion price, are subject to adjustment as further described below. Holders of the 3.75% Convertible Notes who convert their Securities in connection with a ‘‘make-whole fundamental change,’’ as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a ‘‘fundamental change,’’ as defined in the Indenture, holders of the 3.75% Convertible Notes may require the Company to purchase all or a portion of their 3.75% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of 3.75% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. On or after August 1, 2014 and prior to the maturity date, the Company may redeem for cash all or a portion of the 3.75% Convertible Notes if the closing sale price of its common stock exceeds 130% of the applicable conversion price (the initial conversion price is approximately $9.47 per share of common stock) of such 3.75% Convertible Notes for at least 20 trading days during any consecutive 30 trading-day period (including the last trading day of such period). In accordance with Accounting Standards Codification, or ASC 470-20, Debt with Conversion and Other Options, the Company separately accounts for the liability and equity conversion components of the 3.75% Convertible Notes. The principal amount of the liability component of the 3.75% Convertible Notes was $75.9 million as of the date of issuance based on the present value of its cash flows using a discount rate of 10%, our approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity conversion component was $24.1 million. A portion of the initial purchaser’s discount and commission and the offering costs totaling $0.9 million was allocated to the equity conversion component. The liability component is being accreted to the principal amount of the 3.75% Convertible Notes using the effective interest method over five years. 3.50% Convertible Senior Notes due February 2018 In February 2013, the Company issued $115.0 million aggregate principal amount of its 3.50% Convertible Notes to certain QIBs. The 3.50% Convertible Notes were offered and sold to the QIBs pursuant to Rule 144A. The net proceeds from the offering, after deducting the initial purchaser’s discount and commission and the related offering costs, were approximately $110.5 million. The offering costs and the initial purchaser’s discount and commission (which are recorded in Other Assets) are both being amortized to interest expense using the effective interest method over five years. The 3.50% Convertible Notes bear interest at a rate of 3.50% per year, payable semi-annually in arrears in cash on February 1 and August 1 of each year, beginning on August 1, 2013. The 3.50% Convertible Notes will mature on February 1, 2018, unless earlier repurchased, redeemed or converted. In April 2014, through a series of transactions, the Company refinanced approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes with approximately $70.3 million aggregate principal amount of the Company’s new 3.50% Series A Convertible Senior 114 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 13. Debt (Continued) Notes due 2018 (the ‘‘3.50% Series A Convertible Notes’’). The remaining balance of the 3.50% Convertible Notes was $44.7 million as of June 30, 2014. The 3.50% Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Convertible Notes may convert their 3.50% Convertible Notes at any time until the close of business on the business day immediately preceding the maturity date. The 3.50% Convertible Notes are convertible, as described below into common stock of the Company at an initial conversion rate equal to 187.6877 shares of common stock per $1,000 principal amount of the 3.50% Convertible Notes, which is equivalent to a conversion price of approximately $5.33 per share of common stock, subject to adjustment. Holders of the 3.50% Convertible Notes who convert their 3.50% Convertible Notes in connection with a ‘‘make-whole fundamental change’’, as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a ‘‘fundamental change,’’ as defined in the Indenture, holders of the 3.50% Convertible Notes may require the Company to purchase all or a portion of their 3.50% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of 3.50% Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. In accordance with guidance in ASC 470-20, Debt with Conversion and Other Options and ASC 815-15, Embedded Derivatives, the Company determined that the embedded conversion components of the 3.50% Convertible Note do not require bifurcation and separate accounting. The remaining $44.7 million principal amount of the 3.50% Convertible Note has been recorded in Long-term Debt on the consolidated balance sheet as of June 30, 2014. 3.50% Series A Convertible Senior Notes due February 2018 On April 17, 2014, the Company entered into note exchange agreements with certain holders (the ‘‘Participating Holders’’) of the 3.50% Convertible Notes to refinance approximately $70.3 million aggregate principal amount of the 3.50% Convertible Notes with approximately $70.3 million aggregate principal amount of the 3.50% Series A Convertible Notes. Pursuant to the note exchange agreements, the Company also paid the Participating Holders an aggregate of approximately $0.4 million in cash in connection with such transactions. The principal amount of 3.50% Convertible Notes refinanced for each $1,000 principal amount of the 3.50% Series A Convertible Notes was $1,000 and the amount in cash paid per $1,000 principal amount of such 3.50% Convertible Notes delivered was determined in individual negotiations between the Company and each Participating Holder. The Series A Convertible Notes have the same interest rate, maturity and other terms as the 3.50% Convertible Notes, except that the 3.50% Series A Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s option. The 3.50% Series A Convertible Notes were issued under an Indenture between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Holders of the 3.50% Series A Convertible Notes may convert their Securities at any time on or after November 1, 2017 until the close of business on the business day immediately preceding the maturity date. Prior to November 1, 2017, holders of the 3.50% Series A Convertible Notes may convert their Securities only under the following circumstances: (1) during any calendar quarter after the calendar quarter ending September 30, 2014, and only during such calendar quarter, if the closing sale price of the Company’s common stock for each of 20 or more trading days in the 30 consecutive trading days ending on the 115 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 13. Debt (Continued) last trading day of the immediately preceding calendar quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding calendar quarter; (2) during the five consecutive business days immediately after any five consecutive trading-day period (such five consecutive trading-day period, the ‘‘Note Measurement Period’’) in which the trading price per $1,000 principal amount of 3.50% Series A Convertible Notes for each trading day of that Securities Measurement Period was equal to or less than 98% of the product of the closing sale price of shares of the Company’s common stock and the applicable conversion rate for such trading day; or (3) upon the occurrence of specified corporate transactions as described in the Indenture. Upon conversion by holders of the 3.50% Series A Convertible Notes, the Company will have the right to pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof, at the Company’s election. At any time on or prior to the 17th business day immediately preceding the maturity date, the Company may irrevocably elect to (a) deliver solely shares of common stock of the Company in respect of the Company’s conversion obligation or (b) pay cash up to the aggregate principal amount of the 3.50% Series A Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of common stock of the Company or a combination thereof in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the 3.50% Series A Convertible Notes being converted. The initial conversion rate is 187.6877 shares of the Company’s common stock per $1,000 principal amount of 3.50% Series A Convertible Notes (which represents an initial conversion price of approximately $5.33 per share of the Company’s common stock). The conversion rate, and thus the conversion price, are subject to adjustment as further described below. Holders of the 3.50% Series A Convertible Notes who convert their Notes in connection with a ‘‘make-whole fundamental change’’, as defined in the Indenture, may be entitled to a make-whole premium in the form of an increase in the conversion rate. Additionally, in the event of a ‘‘fundamental change,’’ as defined in the Indenture, holders of the 3.50% Series A Convertible Notes may require the Company to purchase all or a portion of their 3.50% Convertible Notes at a fundamental change repurchase price equal to 100% of the principal amount of the 3.50% Series A Convertible Notes, plus accrued and unpaid interest, if any, to, but not including, the fundamental change repurchase date. In accordance with Accounting Standards Codification, or ASC 470-20, Debt with Conversion and Other Options, the Company separately accounts for the liability and equity conversion components of the 3.50% Series A Convertible Notes. The principal amount of the liability component of the 3.50% Series A Convertible Notes was $62.5 million as of the date of issuance based on the present value of its cash flows using a discount rate of 7%, our approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity conversion component was $7.9 million. In addition, the portion of the cash amount paid to the Participating Holders totaling $370 thousand was allocated to the debt discount with the remaining $47 thousand to equity component. The liability component is being accreted to the principal amount of the 3.50% Series A Convertible Notes using the effective interest method through the maturity in February 2018. 116 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 13. Debt (Continued) The following table presents the carrying values of all Convertible Notes as of June 30, 2014 (in thousands): 3.75% Notes 3.50% Notes 3.50% Series A Notes TOTAL Carrying amount of the equity conversion component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,189 $ — $ 7,844 $ 31,033 Principal amount of the Convertible Notes . . . . . . . . Unamortized debt discount . . . . . . . . . . . . . . . . . . . $100,000 (11,489) Net carrying amount . . . . . . . . . . . . . . . . . . . . . . . . $ 88,511 $44,654 — $44,654 $70,346 (7,899) $215,000 (19,388) $62,447 $195,612 As of June 30, 2014, the remaining period over which the unamortized debt discount of the 3.75% Convertible Notes will be amortized is 25 months using an effective interest rate of 10.9%; the remaining amortization period of the 3.50% Series A Convertible Notes is 43 months using an effective interest rate of 7.10%. A summary of interest expense on all Convertible Notes is as follows (in thousands): Interest expense related to contractual interest coupon . . . . . . . . . . . . . . Interest expense related to amortization of debt discount . . . . . . . . . . . . . Interest expense related to amortization of debt issuance costs . . . . . . . . . $ 7,774 5,105 1,408 $ 5,292 4,302 784 $3,438 3,596 363 $14,287 $10,378 $7,397 Year ended June 30, 2014 2013 2012 14. Employee Benefit Plans The Company’s employee savings and retirement plan is qualified under Section 401(k) of the United States Internal Revenue Code. Employees may make voluntary, tax-deferred contributions to the 401(k) Plan up to the statutorily prescribed annual limit. The Company makes discretionary matching contributions to the 401(k) Plan on behalf of employees up to the limit determined by the Board of Directors. The Company contributed $2.1 million, $2.3 million and $2.2 million to the 401(k) Plan during the years ended June 30, 2014, 2013 and 2012, respectively. 15. Defined Benefit Pension Obligation The Company has established a defined pension plan for its employees in Switzerland subsidiary. The plan provides benefits to employees upon retirement, death or disability. The Company uses June 30 as the year-end measurement date for this plan. The unfunded liability of $1.0 million was recognized in long-term other liabilities in the accompanying balance sheet as of June 30, 2014. Actuarial loss of $0.6 million was recognized in other comprehensive income (loss) in fiscal 2014. 117 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 16. Restructuring Charges Fiscal 2013 Restructuring During fiscal 2013, the Company initiated a number of restructuring activities to address various areas of its business, including changes in the executive management team and increased focus on improving its commercial execution, revenue growth and profitability. In the year ended June 30, 2013, the Company recorded restructuring charges of $9.1 million, included in general and administrative expenses in the consolidated statements of operations and comprehensive loss. Restructuring expenses during the year ended June 30, 2013 were comprised of the following: (cid:127) Lease termination charge of $1.4 million, net of estimated sub-lease income, for the remaining lease obligations on an office facility that the Company vacated, and a charge of $0.3 million related to the disposition of certain fixed assets and the write-down of leasehold improvements at this office facility. (cid:127) Severance-related charges of $7.4 million primarily related to the terminations of the Company’s former Chief Executive Officer and Chief Operating Officer and a 13% reduction in its worldwide headcount. Fiscal 2012 Restructuring In fiscal 2012, the Company initiated a restructuring plan to reposition its workforce to appropriately support its growth strategy and to help achieve cost synergies associated with its acquisition of TomoTherapy. In connection with this restructuring plan, the Company eliminated approximately 51 full-time positions worldwide, across various functions, and recorded an associated restructuring charge of approximately $1.7 million, primarily comprised of severance and related benefits. For the year ended June 30, 2012, the Company recorded total restructuring charges of $1.9 million, including the $1.7 million of restructuring expenses discussed above. 17. Quarterly Financial Data (unaudited) The following table provides the selected quarterly financial data for fiscal 2014 and 2013 (in thousands, except per share amounts): Quarters ended September 30, 2013 December 31, March 31, 2013 2014 June 30, 2014 Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings per share—basic and diluted . . . . . . . . . Shares used in basic and diluted per share calculation $ 76,641 $ 26,478 $(15,533) (0.21) $ 74,700 $93,634 $38,171 $ (5,441) $ (0.07) 75,280 $97,144 $102,000 $ 38,447 $39,704 $ (4,665) $ (9,809) (0.13) $ (0.06) $ 76,879 76,382 118 Accuray Incorporated Notes to Consolidated Financial Statements (Continued) 17. Quarterly Financial Data (unaudited) (Continued) Quarters ended September 30, 2012 December 31, March 31, 2012 2013 June 30, 2013 Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from continuing operations . . . . . . . . . . . . . . . . Loss from discontinued operations . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net earnings per share—basic and diluted— continuing operations . . . . . . . . . . . . . . . . . . . . . . Net earnings per share—basic and diluted— discontinued operations . . . . . . . . . . . . . . . . . . . . . Net earnings per share—basic and diluted—net loss . . Shares used in basic and diluted per share calculation $ 82,748 $ 23,676 $(21,930) $ (2,200) $(24,130) $ $ $ (0.31) (0.03) (0.34) 71,995 $ 77,779 $ 26,626 $(25,513) $ (3,658) $(29,171) $ $ $ (0.35) (0.05) (0.40) 72,870 $ 84,900 $ 70,547 $ 20,053 $ 27,285 $(31,203) $(18,715) $ — — $ $(31,203) $(18,715) $ $ $ (0.42) $ (0.25) — $ (0.42) $ 74,016 — (0.25) 74,270 119 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2014. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by our Annual Report on Form 10-K, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in ‘‘1992 Internal Control—Integrated Framework’’ issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of June 30, 2014, based upon the framework in ‘‘1992 Internal Control—Integrated Framework’’. Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of the audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting as of June 30, 2014. (c) Changes in Internal Control over Financial Reporting Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014, and has concluded that there was no change during such quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations of Internal Controls Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Item 9B. OTHER INFORMATION None. 120 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Accuray Incorporated We have audited the internal control over financial reporting of Accuray Incorporated (a Delaware Corporation) and subsidiaries (the ‘‘Company’’) as of June 30, 2014, based on criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2014, based on criteria established in the 1992 Internal Control— Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended June 30, 2014, and our report dated August 29, 2014 expressed an unqualified opinion on those financial statements. /s/ GRANT THORNTON LLP San Francisco, California August 29, 2014 121 PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors, Executive Officers and Corporate Governance The information in our 2014 Proxy Statement regarding directors and executive officers appearing under the headings ‘‘Proposal One—Election of Directors,’’ ‘‘Executive Officers’’ and ‘‘Section 16(a) Beneficial Ownership Reporting Compliance’’ is incorporated herein by reference. In addition, the information in our 2014 Proxy Statement regarding the director nomination process, the Audit Committee financial expert and the identification of the Audit Committee members appearing under the heading ‘‘Corporate Governance and Board of Directors Matters’’ is incorporated herein by reference. There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors. Code of Conduct and Ethics We have adopted a Code of Conduct and Ethics that applies to all employees including our principal executive officer and principal financial officer. The full texts of our codes of business conduct and ethics are posted on our website at www.accuray.com under the Investor Relations section. We intend to disclose future amendments to certain provisions of our codes, or waivers of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waiver. The inclusion of our web site address in this report does not include or incorporate by reference the information on our web site into this report. Item 11. EXECUTIVE COMPENSATION The information in our 2014 Proxy Statement appearing under the headings ‘‘Executive Compensation,’’ ‘‘Compensation Committee Report,’’ ‘‘Compensation Discussion and Analysis,’’ ‘‘Compensation of Non-Employee Directors’’ and ‘‘Compensation Committee Interlocks and Insider Information’’ is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information in our 2014 Proxy Statement appearing under the heading ‘‘Security Ownership of Certain Beneficial Owners and Management’’ and ‘‘Equity Compensation Plan Information’’ is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information in our 2014 Proxy Statement appearing under the headings ‘‘Certain Relationships and Related Party Transactions’’ and ‘‘Corporate Governance—Director Independence’’ is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information in our 2014 Proxy Statement appearing under the headings ‘‘Proposal Three— Ratification of Appointment of Independent Registered Public Accounting Firm—Audit and Non-Audit Services’’ and ‘‘Proposal Three—Ratification of Appointment of Independent Registered Public Accounting Firm—Audit Committee Pre-Approval Policies and Procedures’’ is incorporated herein by reference. 122 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) We have the filed the following documents as part of this report: 1. Consolidated Financial Statements (as set forth in Item 8) Page No. Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations and Comprehensive Loss . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 79 80 81 82 83 2. Consolidated Financial Statement Schedules The financial statement schedule of the Registrant and its subsidiaries for fiscal years 2014, 2013 and 2012 is filed as a part of this report and should be read in conjunction with the Consolidated Financial Statements of the Registrant and its subsidiaries. All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Form 10-K. 3 Exhibits The following exhibits are incorporated by reference or filed herewith. Exhibit No. Exhibit Description 2.1 2.2 3.1 Agreement and Plan of Merger of Accuray Incorporated, a Delaware Corporation, and Accuray Incorporated, a California Corporation, dated as of February 3, 2007. Agreement and Plan of Merger, by and among Registrant, Jaguar Acquisition, Inc. and TomoTherapy Incorporated dated March 6, 2011. Amended and Restated Certificate of Incorporation of Registrant. Incorporated by Reference Filer (ARAY/ TOMO) Form File No. Exhibit Filing Date Furnished or Filed Herewith ARAY S-1/A 333-138622 2.1 02/07/2007 ARAY 8-K 001-33301 2.1 03/07/2011 ARAY 8-K 001-33301 3.1 02/06/2013 123 Incorporated by Reference Filer (ARAY/ TOMO) ARAY Form 8-K File No. Exhibit Filing Date 001-33301 3.1 08/29/2011 Furnished or Filed Herewith ARAY 10-Q 001-33301 10.1 11/08/2011 ARAY 10-Q 001-33301 4.1 05/09/2013 ARAY S-1 333-138622 4.2 11/13/2006 ARAY S-1/A 333-138622 4.3 02/05/2007 ARAY 8-K 001-33301 4.1 04/25/2014 Exhibit No. Exhibit Description 3.2 4.1 4.2 4.3 4.4 4.5 Amended and Restated Bylaws of Registrant. Indenture by and between Registrant and the Bank of New York Mellon Trust Company, N.A., dated as of August 1, 2011. Indenture by and between Registrant and the Bank of New York Mellon Trust Company, N.A., dated as of February 13, 2013. Investors’ Rights Agreement by and between Registrant and purchasers of Series A Preferred Stock, Series A1 Preferred Stock, Series B Preferred Stock and Series C Preferred Stock and certain holders of common stock, dated October 30, 2006. Form of Common Stock Certificate. Indenture by and between Registrant and the Bank of New York Mellon Trust Company, N.A., dated as of April 24, 2014. 124 Exhibit No. Exhibit Description Filer (ARAY/ TOMO) Incorporated by Reference Form S-1 File No. Exhibit Filing Date 333-138622 10.1 11/13/2006 Furnished or Filed Herewith 10.1 10.1(a) 10.2 10.3 10.4 10.5 Industrial Complex Lease ARAY by and between Registrant and MP Caribbean, Inc., dated July 14, 2003, as amended by the First Amendment to Industrial Complex Lease effective as of December 9, 2004 and the Second Amendment to Industrial Complex Lease effective as of September 25, 2006. ARAY 10-K 001-33301 10.1(a) 09/04/2007 ARAY 10-Q 001-33301 10.3 02/04/2010 ARAY 10-Q 001-33301 10.4 02/04/2010 ARAY 10-Q 001-33301 10.5 02/04/2010 ARAY 8-K 001-33301 10.1 06/24/2014 Third Amendment to Industrial Complex Lease dated January 16, 2007. Fourth Amendment to Industrial Complex Lease by and between the Registrant and BRCP Caribbean Portfolio, LLC, dated September 18, 2007. Fifth Amendment to Industrial Complex Lease by and between the Registrant and BRCP Caribbean Portfolio, LLC, dated April 1, 2008. Sixth Amendment to Industrial Complex Lease by and between the Registrant and I & G Caribbean, Inc., dated December 18, 2009. Seventh Amendment to Lease by and between the Registrant and DWF III Caribbean, LLC, dated June 20, 2014. 125 Exhibit No. Exhibit Description Filer (ARAY/ TOMO) 10.6 Standard Industrial Lease ARAY by and between Registrant and The Realty Associates Fund III, L.P., effective as of June 30, 2005. Incorporated by Reference Form S-1 File No. Exhibit Filing Date 333-138622 10.2 11/13/2006 Furnished or Filed Herewith 10.7* Accuray Incorporated ARAY S-1 333-138622 10.3 11/13/2006 1993 Stock Option Plan and forms of agreements relating thereto. 10.8* Accuray Incorporated 1998 Equity Incentive Plan and forms of agreements relating thereto. 10.9* Accuray Incorporated 2007 Incentive Award Plan. 10.10* Accuray Incorporated 2007 Employee Stock Purchase Plan, as amended. ARAY S-1 333-138622 10.4 11/13/2006 ARAY 10-K 001-33301 10.8 09/19/2011 ARAY 10-Q 001-33301 10.2 05/07/2014 10.11* Form of Indemnification ARAY 10-Q 001-33301 10.7 05/10/2011 Agreement by and between Registrant and each of its directors and executive officers. 10.12‡ Nonexclusive End-User ARAY S-1 333-138622 10.18 11/13/2006 Software License Agreement by and between Registrant and The Regents of the University of California, dated September 9, 2005. 10.13‡ License Agreement by ARAY S-1 333-138622 10.19 11/13/2006 and between Registrant and The Board of Trustees of the Leland Stanford Junior University, effective as of July 9, 1997. 10.14* Accuray Incorporated ARAY 10-Q 001-33301 10.1 02/08/2012 Performance Bonus Plan. 126 Incorporated by Reference Filer (ARAY/ TOMO) TOMO Form S-1 File No. Exhibit Filing Date 333-140600 10.13 02/12/2007 Furnished or Filed Herewith TOMO S-1 333-140600 10.14 02/12/2007 ARAY S-8 333-174952 99.1 06/17/2011 ARAY S-8 333-174952 99.2 06/17/2011 ARAY S-8 333-174952 99.3 06/17/2011 Exhibit No. Exhibit Description 10.15 10.16 10.17 10.18 10.19 Lease Agreement by and between TomoTherapy Incorporated and Old Sauk Trails Park Limited Partnership, dated January 26, 2005. Lease Agreement, dated October 28, 2005, between TomoTherapy Incorporated and Adelphia, LLC. TomoTherapy Incorporated 2000 Stock Option Plan, as amended, and forms of option agreements thereunder. TomoTherapy Incorporated 2002 Stock Option Plan, as amended, and forms of option agreements thereunder. TomoTherapy Incorporated 2007 Equity Incentive Plan, as amended, and forms of option agreements thereunder. 10.20 Development and OEM TOMO S-1/A 333-140600 10.11 04/16/2007 10.21 Supply Agreement by and between TomoTherapy Incorporated and Analogic Corporation, dated January 27, 2003. License Agreement 98-0228, dated February 22, 1999, between TomoTherapy Incorporated and Wisconsin Alumni Research Foundation. TOMO S-1/A 333-140600 10.4 04/19/2007 127 Incorporated by Reference Filer (ARAY/ TOMO) TOMO Form S-1 File No. Exhibit Filing Date 333-146219 10.31 09/21/2007 Furnished or Filed Herewith TOMO 8-K 001-33452 10.2 12/30/2008 ARAY 10-K 001-33301 10.54 09/19/2012 ARAY 8-K 001-33301 10.1 10/17/2012 Exhibit No. Exhibit Description 10.22 10.23 10.24 Amendment to License Agreement 90-0228, between TomoTherapy Incorporated and Wisconsin Alumni Research Foundation, dated April 16, 2007. Amendment to License Agreement 90-0228 between TomoTherapy Incorporated and Wisconsin Alumni Research Foundation, dated December 16, 2008. Amendment to Lease between Registrant and OAW Orleans 1310, LLC, as successor to The Realty Associates Fund III, L.P., dated April 12, 2011. 10.25* Employment Agreement, by and between Joshua H. Levine and the Registrant, dated October 12, 2012. 10.26* General Release and ARAY 10-Q 001-33301 10.2 02/06/2013 Separation Agreement by and between the Registrant and Euan S. Thomson, Ph.D., dated October 27, 2012. 10.27* Consulting Services Agreement by and between Registrant and Euan S. Thomson, Ph.D., dated October 27, 2012. ARAY 10-Q 001-33301 10.3 02/06/2013 10.28* General Release and ARAY 10-Q 001-33301 10.4 02/06/2013 Separation Agreement by and between Registrant and Chris Raanes, dated November 26, 2012. 128 Exhibit No. Exhibit Description Incorporated by Reference Filer (ARAY/ TOMO) Form File No. Exhibit Filing Date Furnished or Filed Herewith 10.29† Purchase Agreement and ARAY 10-Q 001-33301 10.5 02/06/2013 Release by and among the Registrant, TomoTherapy Incorporated and Compact Particle Acceleration Corporation, dated December 21, 2012. 10.30* Renewal Executive ARAY 10-Q 001-33301 10.1 05/09/2013 Employment Agreement by and between the Registrant and Derek Bertocci, dated January 1, 2013. 10.31* Renewal Executive ARAY 10-Q 001-33301 10.2 05/09/2013 Employment Agreement by and between the Registrant and Theresa Dadone, dated January 1, 2013. 10.32* Renewal Executive ARAY 10-Q 001-33301 10.3 05/09/2013 Employment Agreement by and between the Registrant and Kelly Londy, dated January 1, 2013. 10.33* Renewal Executive ARAY 10-Q 001-33301 10.4 05/09/2013 Employment Agreement by and between the Registrant and Darren Milliken, dated January 1, 2013. 10.34* Renewal Executive ARAY 10-Q 001-33301 10.5 05/09/2013 Employment Agreement by and between the Registrant and Robert Ragusa, dated January 1, 2013. 129 Exhibit No. Exhibit Description Incorporated by Reference Filer (ARAY/ TOMO) Form File No. Exhibit Filing Date Furnished or Filed Herewith 10.35* Amendment One to ARAY 10-K 001-33301 10.52 08/29/2013 Renewal Executive Employment Agreement by and between the Registrant and Kelly Londy, dated April 16, 2013. 10.36* Amendment One to ARAY 10-K 001-33301 10.53 08/29/2013 Renewal Executive Employment Agreement by and between the Registrant and Robert Ragusa, dated April 16, 2013. 10.37* Employment Agreement ARAY 8-K 001-33301 10.1 09/03/2013 by and between the Registrant and Gregory Lichtwardt, dated September 3, 2013. 10.38* General Release and ARAY 10-Q 001-33301 10.2 11/08/2013 Separation Agreement by and between Registrant and Derek Bertocci, dated September 25, 2013. 10.39* Consulting Services Agreement by and between Registrant and Derek Bertocci, effective as of September 3, 2013. 10.40 Form of Note Exchange Agreement. 10.41* Consulting Services Agreement by and between Registrant and Darren J. Milliken effective as of February 3, 2014. 21.1 23.1 List of subsidiaries. Consent of Grant Thornton LLP, independent registered public accounting firm. ARAY 10-Q 001-33301 10.3 11/08/2013 ARAY 8-K 001-33301 10.1 04/18/2014 ARAY 10-Q 001-33301 10.1 05/07/2014 X X 130 Exhibit No. Exhibit Description Incorporated by Reference Filer (ARAY/ TOMO) Form File No. Exhibit Filing Date Furnished or Filed Herewith 24.1 31.1 31.2 32.1 Power of Attorney (incorporated by reference to the signature page of this annual report on Form 10-K). Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. 99.1* Form of Performance ARAY 10-Q 001-33301 99.1 02/08/2012 Stock Unit Grant Notice and Performance Stock Unit Agreement. 99.2* Form of Restricted Stock ARAY 8-K 001-33301 99.2 11/23/2011 Unit Grant Notice and Restricted Stock Unit Agreement. 99.3* Form of Stock Option ARAY 8-K 001-33301 99.3 11/23/2011 Grant Notice and Stock Option Agreement. 99.4* Form of Market Stock Unit Grant Notice and Award Agreement. ARAY 8-K 001-33301 99.1 10/17/2012 99.5* Form of 2014 Market ARAY 8-K 001-33301 99.1 09/27/2013 Stock Unit Grant Notice and Award Agreement 101.INS** XBRL Instance Document 131 X X X X X Exhibit No. Exhibit Description 101.SCH** XBRL Taxonomy Extension Schema Document 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document 101.LAB** XBRL Taxonomy Extension Label Linkbase Document 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document Incorporated by Reference Filer (ARAY/ TOMO) Form File No. Exhibit Filing Date Furnished or Filed Herewith X X X X X * Management contract or compensatory plan or arrangement. † ‡ Portions of the exhibit have been omitted pursuant to a request for confidential treatment, which has been granted. The omitted information has been filed separately with the Securities and Exchange Commission. Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with the Securities and Exchange Commission. ** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. The certification attached as Exhibit 32.1 that accompanies this Annual Report on Form 10-K is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Accuray Incorporated under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing. Form 10-K, irrespective of any general incorporation language contained in such filing. 132 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 29th day of August 2014. SIGNATURES ACCURAY INCORPORATED By: /s/ JOSHUA H. LEVINE Joshua H. Levine President and Chief Executive Officer By: /s/ GREGORY E. LICHTWARDT Gregory E. Lichtwardt Executive Vice President and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Joshua H. Levine and Gregory E. Lichtwardt, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following and on the dates indicated. Signature Title Date /s/ JOSHUA H. LEVINE Joshua H. Levine President and Chief Executive Officer and Director (principal executive officer) August 29, 2014 /s/ GREGORY E. LICHTWARDT Gregory E. Lichtwardt Executive Vice President and Chief Financial Officer (principal financial and August 29, 2014 accounting officer) /s/ LOUIS J. LAVIGNE, JR. Louis J. Lavigne, Jr. Chairperson of the Board and Director August 29, 2014 133 Signature Title Date /s/ ELIZABETH DAVILA Elizabeth D´avila Vice Chairperson of the Board and Director August 29, 2014 /s/ JACK GOLDSTEIN, PH.D. Jack Goldstein, PH.D. /s/ RICHARD R. PETTINGILL Richard R. Pettingill /s/ EMAD RIZK, M.D. Emad Rizk, M.D. /s/ ROBERT S. WEISS Robert S. Weiss /s/ DENNIS WINGER Dennis Winger Director Director Director Director Director August 29, 2014 August 29, 2014 August 29, 2014 August 29, 2014 August 29, 2014 134 APPENDIX Accuray Incorporated Reconciliation of GAAP net loss to Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Stock-Based Compensation (Adjusted EBITDA) (In thousands) (Unaudited) Years Ended June 30, 2014 2013 2012 GAAP net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(35,448) $(103,219) $(72,042) 16,220 10,415 16,372 15,149 8,458 8,216 7,037 10,160 2,595 3,573 8,380 12,184 11,313 13,759 3,088 Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,276 $ (55,706) $(21,360) (a) consists of amortization of intangibles—developed technology, distributor licenses and backlog (b) consists of depreciation, primarily on property and equipment (c) consists of stock-based compensation in accordance with ASC 718 (d) consists primarily of interest income from available-for-sale securities and interest expense associated with our convertible notes Four consecutive quarters as the highest rated radiation oncology vendor MD Buyline is a market intelligence organization providing independent analysis and reporting to the healthcare industry. On a quarterly basis, MD Buyline measures user satisfaction based on evaluations by more than 3,300 hospitals in its member network. Respondents rank how satisﬁed they are with their radiation treatment delivery system using six key metrics. Results are reported quarterly through the MD Buyline Market Intelligence Brieﬁng™. Composite SENIOR MANAGEMENT Joshua H. Levine President and Chief Executive Ofﬁcer BOARD OF DIRECTORS Louis J. Lavigne, Jr., Director Chairperson of the Board Gregory E. Lichtwardt Executive Vice President, Operations and Chief Financial Ofﬁcer Elizabeth Dávila Vice Chairperson of the Board Kelly J. Londy Executive Vice President, Chief Commercial Ofﬁcer Joshua H. Levine President, Chief Executive Ofﬁcer and Director 10 9.5 9 8.5 8 7.5 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 MARKET AVERAGE ACCURAY The Q2 2014 briefing shows six consecutive quarters of positive increases in composite satisfaction rating for Accuray – resulting in a top rating in each of the last four quarters. © 2014 MD Buyline. All Rights Reserved. Marketing Intelligence Brieﬁng. Used with permission 6/25/14. $300 $250 $200 $150 $100 $50 $- $450 $400 $350 $300 $250 $200 $150 $100 $50 $- Gross Orders $255M $263M $219M $240M Net Orders $172M $300 $250 $200 $150 $100 $50 $- FY'12 FY'13 FY'14 FY'12 FY'13 FY'14 $409M Revenue $316M $369M FY'12 FY'13 FY'14 $20 $10 $- $(10) $(20) $(30) $(40) $(50) $(60) Adj EBITDA $13M FY'13 FY'14 $- FY'12 ($21.3) ($56M) Adjustment excludes equity based compensation expense See Appendix for complete reconciliation $221M CORPORATE HEADQUARTERS Theresa L. Dadone Senior Vice President, Human Resources Robert W. Hill Senior Vice President, Research and Development Ole S. Mikkelsen Senior Vice President and Chief Information Ofﬁcer Darl S. Moreland Senior Vice President, Regulatory, Quality and Compliance Alaleh Nouri Senior Vice President, General Counsel and Corporate Secretary Jack Goldstein, Ph.D., Director Richard R. Pettingill, Director Emad Rizk, M.D., Director Robert S. Weiss, Director Dennis L. Winger, Director STOCK MARKET INFORMATION As of June 30, 2014 there were 257 stockholders of record of the Company’s capital stock. The Company has not paid dividends on its capital stock. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Grant Thornton San Francisco San Francisco, CA 94111 Accuray is traded on the NASDAQ market under symbol ARAY. INQUIRIES 1310 Chesapeake Terrace Sunnyvale, CA 94089 (408) 716-4600 (phone) (408) 716-4601 (fax) www.accuray.com www.cyberknife.com www.tomotherapy.com LEGAL COUNSEL Wilson Sonsini Goodrich & Rosati Palo Alto, CA 94304 TRANSFER AGENT Computershare 330 N Brand Blvd, Suite 701 Glendale, CA 91203-2389 Communications concerning stock transfer requirements, lost certiﬁcates and changes of address should be directed to the Transfer Agent. Inquiries regarding company ﬁnancial information should be directed to: ACCURAY, INC. Attn: Investor Relations 1310 Chesapeake Terrace Sunnyvale, CA 94089 E-mail: investorrelations@accuray.com ANNUAL REPORT AND FORM 10-K A copy of the Company’s 2014 Annual Report on Form 10-K is ﬁled with the Securities and Exchange Commission and is available, without charge, by calling or writing the Company at the address under Inquiries. A copy of the Company’s 2014 Annual Report is also available online at www.accuray.com. TRADEMARKS “Accuray,” “CyberKnife” and “TomoTherapy” are registered trademarks of the Company. PRECISION MATTERS Like our products, our core business aims for the highest precision Accuray Incorporated 2014 Annual Report 1310 Chesapeake Terrace Sunnyvale, CA 94089 USA Tel: +1.408.716.4600 Toll Free: 1.888.522.3740 Fax: +1.408.716.4601 Email: investorrelations@accuray.com www.Accuray.com Precise, innovative tumor treatments™

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