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
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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
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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
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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
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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).
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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
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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
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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
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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
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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.
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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
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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
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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
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(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.
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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,
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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
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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
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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
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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,
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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
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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.
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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.
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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.
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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
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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.
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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;
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(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
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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™