VIEWRAY, INC. The interim financial statements included in this Quarterly Report on Form 10-Q and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year endedDecember 31, 2019 , and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report filed with theSEC onMarch 12, 2020 . In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors" in this Quarterly Report and the Annual Report that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Unless otherwise indicated, references in this section to "ViewRay ," "we," "us," "our" and the "Company" refer toViewRay, Inc. and its consolidated subsidiary,ViewRay Technologies, Inc. As a result of the merger of the Company andViewRay Technologies, Inc. inJuly 2015 , or the Merger, and the change in business and operations of the Company, a discussion of the past financial results of the Company is not pertinent, and under applicable accounting principles the historical financial results ofViewRay Technologies, Inc. , the accounting acquirer, prior to the Merger are considered the historical financial results of the Company. The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited condensed consolidated financial statements contained in this Quarterly Report, which we have prepared in accordance withU.S. GAAP. You should read the discussion and analysis together with such condensed consolidated financial statements and the related notes thereto. Company Overview We design, manufacture and market the ViewRay MRIdian®. The MRIdian is an innovative system that integrates high quality radiation therapy with simultaneous magnetic resonance imaging (MRI). There are two generations of the MRIdian: the first generation MRIdian with Cobalt-60 based radiation beams and the second generation MRIdian Linac, with more advanced linear accelerator or 'linac' based radiation beams. The MRIdian combines MRI and external-beam radiation therapy to simultaneously image and treat cancer patients. MRI is a broadly used imaging tool that has the ability to clearly differentiate between types of soft tissue. In contrast, X-ray or computed tomography (CT), the most commonly used imaging technologies in radiation therapy today, are often unable to distinguish soft tissues such as the tumor and critical organs. MRIdian integrates MRI technology, radiation delivery and our proprietary software to clearly See the soft tissues, Shape the dose to accommodate for changes in anatomy and Strike the target precisely using real-time targeting throughout the treatment. The MRIdian system is Sized to fit into standard radiation therapy vaults without having to remove ceiling or walls. These capabilities allow MRIdian to deliver radiation to the tumor accurately, while reducing the radiation amount delivered to nearby healthy tissue, as compared to other radiation therapy treatments currently available. We believe this will lead to improved patient outcomes and reduced treatment-related side effects.
Both generations of the MRIdian have received 510(k) marketing clearance from the FDA and permission to affix the CE mark.
• We received initial 510(k) marketing clearance from the FDA for our
treatment planning and delivery software in January 2011 .
21
--------------------------------------------------------------------------------
• We received 510(k) marketing clearance for MRIdian, with Cobalt-60 as the
radiation source, in
to MRIdian with Cobalt-60 in
to be sold within the European Economic Area, or EEA.
• In
of Health, Labor and Welfare to market MRIdian with Cobalt-60 in
well as from the
Cobalt-60 in
• In
linear accelerator as the radiation source) in the EEA.
• In
MRIdian Linac in the United States .
• In June 2017 , we received 510(k) clearance to market RayZR™, ourhigh-resolution beam-shaping multi-leaf collimator. We also received MRIdian
Linac regulatory approval in
in
• In
frames per second cine, and Functional imaging (T1/T2/DWI) and High-Speed
MLC. In
EEA.
• We are also seeking required MRIdian Linac approvals in other countries.
MRIdian is the first radiation therapy solution that enables simultaneous radiation treatment delivery and real-time MRI imaging of a patient's internal anatomy. It generates high-quality images that differentiate between the targeted tumor, surrounding soft tissue and nearby critical organs. MRIdian also records the level of radiation dose that the treatment area has received, enabling physicians to adapt the prescription between treatments, as needed. We believe this improved visualization and accurate dose recording will enable better treatment, improve patient outcomes and reduce side effects. Key benefits to users and patients include: improved imaging and patient alignment; the ability to adapt the patient's radiation treatments to changes while the patient is still on the treatment table, or "on-table adaptive treatment planning"; MRI-based tissue tracking and automated beam gating; and an accurate recording of the delivered radiation dose. Physicians have already used MRIdian to treat a broad spectrum of radiation therapy patients with more than 65 different types of cancer, as well as patients for whom radiation therapy was previously not an option. During the third quarter of 2020, we surpassed a significant milestone by treating more than 10,000 patients. AtSeptember 30, 2020 , a total of 40 MRIdian systems, four MRIdian with Cobalt-60 systems and 36 MRIdian Linac systems, are in operation with 37 customers worldwide (16 inthe United States and 21 outsidethe United States ). In addition, six MRIdian Linacs have been delivered to customers that are in varying stages of deployment. We currently market MRIdian through a direct sales force inthe United States . In the rest of the world, we market MRIdian through a hybrid model of both a direct sales force and distribution network. We market MRIdian to a broad range of worldwide customers, including university research and teaching hospitals, community hospitals, private practices, government institutions and freestanding cancer centers. As with the traditional linac market, our sales and revenue cycles vary based on the particular customer and can be lengthy, sometimes lasting up to 18 to 24 months (or more) from initial customer contact to order contract execution. Following execution of an order contract, it generally takes nine to 15 months for a customer to customize an existing facility or construct a new vault. Upon the commencement of installation at a customer's facility, it typically takes approximately 45 to 90 days for us to install MRIdian and perform on-site testing of the system, including the completion of acceptance test procedures. We generated total revenue of$10.1 million and$20.9 million , and had net losses of$28.1 million and$20.8 million , during the three months endedSeptember 30, 2020 and 2019, respectively. We generated total revenue of$38.6 million and$71.3 million , and net losses of$81.8 and$85.0 million , during the nine months endedSeptember 30, 2020 and 2019, respectively.
We expect to continue to incur significant expenses and operating losses for the foreseeable future, as we:
• navigate our business activities through the impacts of the coronavirus
pandemic;
• continue our research and development efforts;
• seek regulatory approval for MRIdian in certain foreign countries; and
• operate as a public company.
Accordingly, we may seek to fund our operations through public or private
equity, debt financings or other sources. However, we may be unable to raise
additional funds or enter into such other arrangements when needed on favorable
terms or at all. Our failure to raise capital or enter into such other
arrangements as and when needed would have a negative impact on our financial
condition and our ability to develop enhancements to and integrate new
technologies into MR Image-Guided radiation therapy systems.
22--------------------------------------------------------------------------------
Impact of the Coronavirus Disease
The coronavirus pandemic, the resulting global recession and its follow-on
effects have impacted and will continue to impact business activity across
industries worldwide, including
Due to pandemic-related factors like the delays in service from our global supply chain partners and restrictions imposed by government agencies and our customers in response to the spread of coronavirus, we have experienced delays in installation of systems inthe United States ,Asia andEurope . Similarly, our ability to conduct commercial efforts with our customers has been and is likely to continue to be disrupted as customers have in most cases suspended in-person sales calls and turned their focus to dealing with the impact of the coronavirus on their operations. Should the global recession persist as a result of the impact of coronavirus, our ability to conduct our business and access capital markets will be negatively impacted; and capital equipment sales, which makes up the majority of our revenue, may take longer than other areas of the economy in a recovery, which may have a material impact on our business. The coronavirus pandemic continues to develop rapidly, and its continued global economic impact may negatively impact our operations in areas that we are not aware of currently. In the first quarter of 2020, we initiated a contingency plan with the goal to reduce our cash usage by approximately$30 million during the remainder of 2020, largely through reductions in operating expense, working capital and company-wide salary reductions. Regarding company-wide salary reductions, our executive leadership team, including our board of directors, reduced their salaries by as much as 30%, and reductions were then cascaded down at lesser rates through the organization. The company-wide salary reductions remain in effect for our executive leadership team, including our board of directors. However, the reductions at lesser rates for others in our organization were restored inOctober 2020 . In lateJune 2020 , we finalized and communicated a plan to reduce our workforce by approximately 20%. The plan was implemented onJuly 6, 2020 . As ofSeptember 30, 2020 , we remain on track with our contingency plan to reduce cash usage by approximately$30 million .
New Orders and Backlog
New orders are defined as the sum of gross product orders, representing MRIdian contract price, recorded in backlog during the period. Backlog is the accumulation of all orders for which revenue has not been recognized and which we consider valid. Backlog includes customer deposits or letters of credit, except when the sale is to a customer where a deposit is not deemed necessary or customary. Deposits received are recorded in a customer deposit liability account on the balance sheet. Orders may be revised or cancelled according to their terms or upon mutual agreement between the parties. Therefore, it is difficult to predict with certainty the amount of backlog that will ultimately result in revenue. The determination of backlog includes objective and subjective judgment about the likelihood of an order contract becoming revenue. We perform a quarterly review of backlog to verify that outstanding orders in backlog remain valid, and based upon this review, orders that are no longer expected to result in revenue are removed from backlog. Among other criteria to consider for a transaction to be in backlog, we must possess both an outstanding and effective written agreement for the delivery of a MRIdian signed by a customer with a minimum customer deposit or a letter of credit requirement except when the sale is to a customer where a deposit is not deemed necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, sales via tender awards, or indirect channel sales that have signed contracts with end-customers). We decide whether to remove or add back an order from or to our backlog by evaluating the following criteria: changes in customer or distributor plans or financial conditions; the customer's or distributor's continued intent and ability to fulfill the order contract; changes to regulatory requirements; the status of regulatory approval required in the customer's jurisdiction, if any; the length of time the order has been on our backlog; and other reasons for potential cancellation of order contracts. During the nine months endedSeptember 30, 2020 , we received twelve new orders for MRIdian systems, totaling$70.6 million . AtSeptember 30, 2020 , we had total backlog of$238.9 million .
Components of Statements of Operations
Revenue
Product Revenue. Product revenue consists of revenue recognized from sales of
MRIdian systems, as well as optional components, such as additional planning
workstations and body coils.
Following execution of an order contract, it generally takes nine to 15 months
for a customer to customize an existing facility or construct a new vault for
the purchased system. Upon the commencement of installation at a customer's
facility, it typically takes approximately 45 to 90 days to complete the
installation and on-site testing of the system, including the completion of
customer test procedures. On-site training can take up to multiple weeks and can
be conducted concurrently with installation and acceptance testing. Order
contracts generally include customer deposits upon execution of the agreement,
and in certain cases, additional amounts due at shipment or commencement of
installation, and final payment due generally upon customer acceptance.
Beginning in the second quarter of 2019, for new contracts in which control of
the system transfers upon delivery and inspection, the Company recognizes
revenue for the system at the point in time when delivery and inspection has
occurred. For these same contracts, the Company recognizes installation revenue
over a period of time as control of the installation services are transferred.
For all contracts in which control continues to transfer upon post-installation
customer acceptance, revenue for the system and installation
23
--------------------------------------------------------------------------------
will continue to be recognized upon customer acceptance. For sales of MRIdian
systems for which we are not responsible for installation, revenue is recognized
when the entire system is delivered, which is when the control of the system is
transferred to the customer.
Service Revenue. Our contracts typically include service warranty at no
additional costs for one year. In addition, we offer multi-year,
post-installation maintenance and support contracts that provide various levels
of service support, which enables our customers to select the level of on-going
support services, including parts and labor, which they require. These
post-installation contracts are for a period of one to five years and provide
services ranging from on-site parts and labor, and preventative maintenance to
labor only with a longer response time. We also offer technology upgrades to our
MRIdian systems, when and if available, for an additional fee. Service revenue
is recognized ratably over the term during which the contracted services are
provided.
Distribution Rights Revenue. In December 2014 , we entered into a distribution
agreement with Itochu Corporation, or Itochu, pursuant to which we appointed
Itochu as our exclusive distributor for the promotion, sale and delivery of
MRIdian products within Japan . As consideration for the exclusive distribution
rights granted, we received $4.0 million , which was recorded as deferred revenue
and since August 2016 , distribution rights revenue has been recognized ratably
over the remaining term of the distribution agreement, which expires in December
2024 . A time-elapsed method is used to measure progress because the control is
transferred evenly over the contractual period.
Cost of Revenue
Product Cost of Revenue. Product cost of revenue primarily consists of the cost of materials, installation and services associated with the manufacturing and installation of MRIdian systems, and royalty payments to theUniversity of Florida Research Foundation . Product cost of revenue also includes lower of cost or net realizable value inventory, or LCNRV, adjustments if the carrying value of the inventory is greater than its net realizable value. We recorded LCNRV charges of$0.0 million and$0.2 million for the three and nine months endedSeptember 30, 2020 , respectively. There were no LCNRV charges for the three or nine months endedSeptember 30, 2019 .
We expect our materials, installation and service costs to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs.
Service Cost of Revenue. Service cost of revenue is comprised primarily of personnel costs, training and travel expenses to service and perform maintenance on installed MRIdian systems. Service cost of revenue also includes the costs of replacement parts under maintenance and support contracts.
Operating Expenses
Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel expenses. Other significant research and development costs arise from third-party consulting services, laboratory supplies, research materials, medical equipment, computer equipment and licensed technology, and related depreciation and amortization. We expense research and development costs as incurred. We will continue to invest in improving MRIdian and developing new technologies. Selling and Marketing. Selling and marketing expenses consist primarily of compensation and related costs for our direct sales force, sales management, and marketing and customer support personnel, and include stock-based compensation, employee benefits and travel expenses. Selling and marketing expenses also include costs related to trade shows and marketing programs. We expense selling and marketing costs as incurred. General and Administrative. Our general and administrative expenses consist primarily of compensation and related costs for our operations, finance, human resources, regulatory, and other administrative personnel, and include stock-based compensation, employee benefits and travel expenses. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, quality and regulatory functions and facilities costs, and gain or loss on the disposal of property and equipment.
Interest Income
Interest income consists primarily of interest income received on our cash and cash equivalents.
Interest Expense
Interest expense consists primarily of interest and amortization related to our SVB Term Loan.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of changes in the fair value of
the 2017 and 2016 Placement Warrants and foreign currency exchange gains and
losses.
24
--------------------------------------------------------------------------------
The outstanding 2017 and 2016 Placement Warrants are re-measured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as a component of other (expense) income, net.
Results of Operations
The following tables set forth our results of operations for the periods
presented:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Revenue:
Product $ 6,210 $ 18,696 $ 28,295 $ 65,475
Service 3,758 2,048 9,909 5,482
Distribution rights 118 118 356 356
Total revenue 10,086 20,862 38,560 71,313
Cost of revenue:
Product 8,550 18,521 34,393 63,368
Service 2,600 1,767 8,380 9,489
Total cost of revenue 11,150 20,288 42,773 72,857
Gross margin (1,064 ) 574 (4,213 ) (1,544 )
Operating expenses:
Research and development 5,245 5,641 17,793 17,135
Selling and marketing 2,669 7,297 11,585 19,845
General and administrative 16,031 19,381 47,046 49,888
Total operating expenses: 23,945 32,319 76,424 86,868
Loss from operations (25,009 ) (31,745 ) (80,637 ) (88,412 )
Interest income 5 484 787 1,391
Interest expense (1,074 ) (1,069 ) (3,183 ) (2,902 )
Other (expense) income, net (2,047 ) 11,499 1,224 4,933
Loss before provision for
income taxes (28,125 ) (20,831 ) (81,809 ) (84,990 )
Provision for income taxes - - - -
Net loss $ (28,125 ) $ (20,831 ) $ (81,809 ) $ (84,990 ) Comparison of the Three Months Ended
Revenue
Three Months Ended September 30,
2020 2019 Change
(in thousands)
Product $ 6,210 $ 18,696 $ (12,486 )
Service 3,758 2,048 1,710
Distribution rights 118 118 -
Total revenue $ 10,086 $ 20,862 $ (10,776 )
Total revenue during the three months ended September 30, 2020 decreased by
$10.8 million compared to the three months ended September 30, 2019 . The
decrease was primarily due to a $12.5 million decrease in product revenue, which
was offset by a $1.7 million increase in service revenue during the three months
ended September 30, 2020 compared to the three months ended September 30, 2019 .
Product Revenue. Product revenue decreased by $12.5 million during the three
months ended September 30, 2020 compared to the three months ended September 30,
2019 . The decrease was primarily attributable to two fewer MRIdian Linac systems
recognized in the three months ended September 30, 2020 as compared to the three
months ended September 30, 2019 .
Service Revenue. Service revenue increased by $1.7 million during the three
months ended September 30, 2020 compared to the three months ended September 30,
2019 primarily due to the increase in installed base. The $1.7 million increase
includes a $0.2 million release of deferred revenue that was related to MRIdian
Linac software upgrades.
25
--------------------------------------------------------------------------------
Cost of Revenue
Three Months Ended September 30,
2020 2019 Change
(in thousands)
Product $ 8,550 $ 18,521 $ (9,971 )
Service 2,600 1,767 833
Total cost of revenue $ 11,150 $ 20,288 $ (9,138 )
Product Cost of Revenue. Product cost of revenue decreased by $10.0 million
during the three months ended September 30, 2020 compared to the three months
ended September 30, 2019 . The decrease was primarily attributable to two fewer
MRIdian Linac systems recognized during the three months ended September 30,
2020 compared to the three months ended September 30, 2019 .
Service Cost of Revenue. Service cost of revenue remained relatively flat as
compared to the service revenue increase during the three months ended
September 30, 2020 compared to the three months ended September 30, 2019 ,
primarily due to a decrease in the cost of service-related inventory parts and
coronavirus related reductions in travel and payroll reductions for our service
personnel.
Operating Expenses
Three Months Ended September 30,
2020 2019 Change
(in thousands)
Research and development $ 5,245 $ 5,641 $ (396 )
Selling and marketing 2,669 7,297 (4,628 )
General and administrative 16,031 19,381 (3,350 )
Total operating expenses $ 23,945 $ 32,319 $ (8,374 )
Research and Development. Research and development expenses during the three
months ended September 30, 2020 decreased by $0.4 million compared to the three
months ended September 30, 2019 . The decrease was primarily attributable to a
$0.5 million decrease in travel expense attributable to coronavirus related
reductions in travel for our research and development workforce.
Selling and Marketing. Selling and marketing expenses during the three months
ended September 30, 2020 decreased by $4.6 million compared to the three months
ended September 30, 2019 . The decrease was primarily attributable to a $2.0
million decrease in personnel expense in the form of sales related compensation
and the reduction in workforce, a $1.1 million decrease in travel expense
primarily driven by coronavirus related reductions in travel for our sales and
marketing workforce, and a $1.1 million decrease in marketing expense primarily
driven by the postponement or cancellation of clinical conferences.
General and Administrative. General and administrative expenses during the three
months ended September 30, 2020 decreased by $3.4 million compared to the three
months ended September 30, 2019 . The decrease was primarily attributable to a
$1.8 million decrease in travel expense primarily driven by coronavirus related
reductions in travel for our general and administrative workforce, a $1.1
million decrease in personnel expense due to the reduction in workforce, and a
$0.7 million decrease in consulting and other professional service expense.
Interest Income
Three Months Ended September 30,
2020 2019 Change
(in thousands)
Interest income $ 5 $ 484 $ (479 ) Interest income decreased by
Interest Expense
Three Months Ended September 30,
2020 2019 Change
(in thousands)
Interest expense $ (1,074 ) $ (1,069 ) $ (5 )
Interest expense related to the SVB Term Loan remained flat during the three
months ended September 30, 2020 compared to the three months ended September 30,
2019 .
26
--------------------------------------------------------------------------------
Other (Expense) Income, Net
Three Months Ended September 30,
2020 2019 Change
(in thousands)
Other (expense) income, net $ (2,047 ) $ 11,499 $ (13,546 )
Other (expense) income, net during the three months ended September 30, 2020
consisted primarily of a $2.0 million increase in the fair value of warrant
liabilities related to the 2017 and 2016 Placement Warrants as a result of the
increase in the Company's stock price. Other (expense) income, net during the
three months ended September 30, 2019 consisted primarily of a $11.6 million
decrease in the fair value of warrant liabilities related to the 2017 and 2016
Placement Warrants.
Comparison of the Nine Months Ended
Revenue
Nine Months Ended September 30,
2020 2019 Change
(in thousands)
Product $ 28,295 $ 65,475 $ (37,180 )
Service 9,909 5,482 4,427
Distribution rights 356 356 -
Total revenue $ 38,560 $ 71,313 $ (32,753 )
Total revenue during the nine months ended September 30, 2020 decreased by $32.8
million compared to the nine months ended September 30, 2019 . The decrease was
primarily due to a $37.2 million decrease in product revenue, offset by a $4.4
million increase in service revenue during the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 .
Product Revenue. Product revenue decreased by $37.2 million during the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019 . The decrease was primarily attributable to six fewer MRIdian Linac systems
recognized in the nine months ended September 30, 2020 as compared to the nine
months ended September 30, 2019 . In addition, for the nine months ended
September 30, 2019 , the Company recognized $0.9 million in revenue from
performance obligations satisfied in 2018.
Service Revenue. Service revenue increased by $4.4 million during the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019 due to the increase in installed base. The $4.4 million increase includes a
$0.5 million release of deferred revenue that was related to a service contract
and a $0.2 million release of deferred revenue that was related to MRIdian Linac
software upgrades.
Cost of Revenue
Nine Months Ended September 30,
2020 2019 Change
(in thousands)
Product $ 34,393 $ 63,368 $ (28,975 )
Service 8,380 9,489 (1,109 )
Total cost of revenue $ 42,773 $ 72,857 $ (30,084 )
Product Cost of Revenue. Product cost of revenue decreased by $29.0 million
during the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019 . The decrease was primarily attributable to six fewer
MRIdian Linac systems recognized during the nine months ended September 30, 2020
as compared to the nine months ended September 30, 2019 . The total cost of
revenue in the nine months ended September 30, 2019 was also impacted by
approximately $6.9 million of charges, primarily driven by higher than
anticipated installation costs related to historical upgrade commitments. The
$6.9 million includes $5.5 million of one-time charges and $1.4 million of
expenses.
Service Cost of Revenue. Service cost of revenue decreased by
27--------------------------------------------------------------------------------
Operating Expenses
Nine Months Ended September 30,
2020 2019 Change
(in thousands)
Research and development $ 17,793 $ 17,135 $ 658
Selling and marketing 11,585 19,845 (8,260 )
General and administrative 47,046 49,888 (2,842 )
Total operating expenses $ 76,424 $ 86,868 $ (10,444 )
Research and Development. Research and development expenses during the nine
months ended September 30, 2020 increased by $0.7 million , compared to the nine
months ended September 30, 2019 . The increase was primarily attributable to a
$0.9 million increase in personnel expense and a $0.6 million increase in
depreciation expense, partially offset by a $0.9 million decrease in travel
expense primarily driven by coronavirus related reductions in travel for our
research and development workforce.
Selling and Marketing. Selling and marketing expenses during the nine months
ended September 30, 2020 decreased by $8.3 million , compared to the nine months
ended September 30, 2019 . This decrease was primarily attributable to a $3.6
million decrease in personnel expense in the form of sales related compensation
and the reduction in workforce, a $2.1 million decrease in travel expense
primarily driven by coronavirus related reductions in travel for our sales and
marketing workforce, a $1.8 million decrease in marketing expense primarily
driven by the postponement or cancellation of clinical conferences, and a $0.6
million decrease in professional services.
General and Administrative. General and administrative expenses during the nine
months ended September 30, 2020 decreased by $2.8 million , compared to the nine
months ended September 30, 2019 . This decrease was primarily driven by a $2.7
million decrease in travel expense attributable to coronavirus related
reductions in travel for our general and administrative workforce and a $0.6
million decrease in professional services. The decreases were partially offset
by a $0.5 million increase in depreciation and amortization expense and a $0.5
million increase in facilities expense.
Interest Income
Nine Months Ended September 30,
2020 2019 Change
(in thousands)
Interest income $ 787 $ 1,391 $ (604 )
Interest income decreased by $0.6 million during the nine months ended September
30, 2020 compared to the nine months ended September 30, 2019 primarily due to a
strategic shift of invested funds from a high to low yield account in 2020.
Interest Expense
Nine Months Ended September 30,
2020 2019 Change
(in thousands)
Interest expense $ (3,183 ) $ (2,902 ) $ (281 )
Interest expense related to the SVB Term Loan increased by $0.3 million during
the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019 .
Other (Expense) Income, Net
Nine Months Ended September 30,
2020 2019 Change
(in thousands)
Other (expense) income, net $ 1,224 $ 4,933 $ (3,709 )
Other (expense) income, net during the nine months ended September 30, 2020
consisted primarily of a $1.3 million decrease in the fair value of warrant
liabilities related to the 2017 and 2016 Placement Warrants. Other (expense)
income, net during the nine months ended September 30, 2019 consisted primarily
of a $4.7 million decrease in the fair value of warrant liabilities related to
the 2017 and 2016 Placement Warrants.
28--------------------------------------------------------------------------------
Liquidity and Capital Resources
Since our inception in 2004, we have incurred significant net losses and negative cash flows from operations. During the nine months endedSeptember 30, 2020 and 2019, we had net losses of$81.8 million and$85.0 million , respectively. AtSeptember 30, 2020 andDecember 31, 2019 , we had an accumulated deficit of$601.0 million and$519.2 million , respectively. AtSeptember 30, 2020 andDecember 31, 2019 , we had cash and cash equivalents of$163.9 million and$226.8 million , respectively. To date, we have financed our operations principally through offerings of our capital stock, issuances of warrants, issuances of convertible promissory notes, use of term loans and receipts of customer deposits for new orders and payments from customers for systems installed and delivered. We may, from time to time, seek to raise capital through a variety of sources, including the public equity market, private equity financing, and public or private debt. InDecember 2019 , we raised aggregate gross proceeds of$149.6 million via a public offering, in which we sold approximately 47.8 million shares of our common stock at a price of$3.13 per share. We expect that our existing cash and cash equivalents, together with proceeds from the sales of MRIdian systems, will enable us to conduct our planned operations for at least the next 12 months. However, the coronavirus pandemic, the resulting recession and its follow-on effects are impacting and will continue to impact our business activities. For further discussion, see the section titled "Impact of the Coronavirus Disease" included above. In the first quarter of 2020, we initiated a contingency plan with the goal to reduce our cash usage by approximately$30 million during the remainder of 2020, largely through reductions in operating expense, working capital and company-wide salary reductions. Regarding company-wide salary reductions, our executive leadership team, including our board of directors, reduced their salaries by as much as 30%, and reductions were then cascaded down at lesser rates through the organization. The company-wide salary reductions remain in effect for our executive leadership team, including our board of directors. However, the reductions at lesser rates for others in our organization were restored inOctober 2020 . In lateJune 2020 , we finalized and communicated a plan to reduce our workforce by approximately 20%. The plan was implemented onJuly 6, 2020 . As ofSeptember 30, 2020 , we remain on track with our contingency plan to reduce cash usage by approximately$30 million . InJanuary 2019 , we filed a registration statement with theSEC which covers the offering, issuance and sale of up to a maximum aggregate offering price of$250.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units, including up to$100.0 million of our common shares pursuant to our at-the-market offering program with FBR. The shares in theDecember 2019 Public Offering of Common stock were sold pursuant to theJanuary 2019 registration statement and did not impact the$100.0 million of our common shares pursuant to our at-the-market offering program with FBR. We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future operating needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and in Part II, Item 1A of this report. The following table summarizes our cash flows for the periods presented (in thousands): Nine Months Ended September 30, 2020 2019 Cash used in operating activities$ (59,680 ) $ (76,632 ) Cash used in investing activities $ (2,201 ) $ (7,598 ) Cash (used in) provided by financing activities $ (965 ) $ 7,063 Operating Activities We have historically experienced cash outflows as we developed MRIdian with Cobalt-60 and MRIdian Linac and expanded our business. Our primary source of cash flow from operating activities is cash receipts from customers including sales of MRIdian systems and, to a lesser extent, up-front payments from customers. Our primary uses of cash from operating activities are amounts due to vendors for purchased components and employee-related expenditures.
During the nine months ended
• Non-cash charges included
related to the change in fair value of the 2017 and 2016 Placement Warrants,
and $1.3 million for the release of historical upgrade commitments.
29
--------------------------------------------------------------------------------
• The net change in our operating assets and liabilities was primarily a
result of changes in customer deposits and deferred revenue and inventory,
which were partially offset by changes in accounts receivable, deferred cost
of revenue, and accounts payable. Customer deposits and deferred revenue
increased
milestones and an increase in customer deposits on orders received as
compared to the customer deposits relieved from orders achieving revenue
recognition during the nine months ended
decreased
receivable increased
milestones and collections. Deferred cost of revenue increased
due to shipments of systems that have not yet met the requirements of
revenue recognition. Accounts payable decreased
of payments.
During the nine months endedSeptember 30, 2019 , cash used in operating activities was$76.6 million , as a result of our net loss of$85.0 million , a$9.4 million net change in our operating assets and liabilities, and offset by aggregate non-cash charges of$17.8 million .
• Non-cash charges included
related to the change in fair value of the 2017 and 2016 Placement Warrants,
and $4.4 million for historical upgrade commitments.
• The net change in our operating assets and liabilities was primarily a
result of changes in customer deposits and deferred revenue and inventory,
which was partially offset by changes in accrued expenses and other
liabilities, accounts receivable, deposits on purchased inventory and
accounts payable. Inventory increased $10.5 million , in anticipation ofupcoming shipments and installations of MRIdian systems. Customer deposits
and deferred revenue decreased
inventory decreased
eleven units of MRIdian system sales and one unit of system upgrade
partially offset by additional accrual for the units currently being
installed. The net change in our operating assets and liabilities was
partially offset by a decrease in accounts receivable of $3.6 million
resulting from the timing of collections. Deferred costs decreased by
million mainly due to the revenue recognized in the first nine months of
2019 offset by the transfer of property and equipment from deferred cost of
revenue. Accounts payable increased
inventory and the timing of payments. Accrued expense and other liabilities
increased by
benefits and accrued travel costs.
Investing Activities
Cash used in investing activities for the nine months endedSeptember 30, 2020 and 2019 of$2.2 million and$7.6 million , respectively, resulted from capital expenditures to purchase property and equipment.
Financing Activities
During the nine months endedSeptember 30, 2020 , financing activities used$1.0 million in cash, consisting primarily of cash used to pay taxes related to net share settlement of equity awards of$0.8 million . During the nine months endedSeptember 30, 2019 , financing activities provided$7.1 million in cash, consisting primarily of$9.6 million from the exercise of stock options, partially offset by cash used to pay taxes related to net share settlement of equity awards of$2.4 million .
SVB Term Loan
InDecember 2018 , we entered into a term loan agreement, or the SVB Term Loan, withSilicon Valley Bank , for a principal amount of$56.0 million . The SVB Term Loan has a maturity date ofDecember 1, 2023 and bears interest at a rate of 6.30% per annum to be paid monthly over the term of the loan. Beginning onDecember 1, 2020 (orJune 1, 2021 , if the Company achieves a trailing twelve-month revenue of at least$215.0 million fromJanuary 1, 2019 toDecember 1, 2020 and elects to apply such later date), the Company will make thirty-six equal monthly payments of principal (or thirty equal payments, if the Company so elects). In addition, upon repayment of the SVB Term Loan in full, the Company will make a final payment equal to 3.15% of the original aggregate principal amount of the SVB Term Loan. OnDecember 31, 2019 , we entered into the First Amendment (the First Amendment) to the SVB Term Loan. The First Amendment, among other things, amended the SVB Term Loan to (i) suspend testing of the minimum revenue financial covenant for the fiscal quarter endedDecember 31, 2019 , (ii) provide for the minimum trailing twelve-month revenue thresholds under the minimum revenue financial covenant for periods ending on the last day of fiscal quarters in fiscal years subsequent to 2020 to be determined annually at the greater of (a) a 25% cushion to revenue forecasts provided by the Company to SVB and (b) 10% year-over-year annual growth, unless otherwise agreed, (iii) increase the minimum liquidity ratio financial covenant from 1.50:1.00 to 1.75:1.00 and (iv) increase the prepayment premium from 1.00% to 2.00% for amounts prepaid under the SVB Term Loan prior to the maturity date thereof, subject to certain exceptions. OnOctober 30, 2020 , the Company entered into the Second Amendment (the Second Amendment) to the SVB Term Loan. Refer to Note 14, Subsequent Events.
The SVB Term Loan is secured by substantially all assets of the Company, except that the collateral does not include any intellectual property held by the Company, provided, however, the collateral does include all accounts and proceeds of such intellectual property.
30
--------------------------------------------------------------------------------
The SVB Term Loan contains customary representations and warranties and
customary affirmative and negative covenants applicable to the Company and its
subsidiaries, including, among other things, restrictions on indebtedness,
liens, investments, mergers, dispositions, prepayment of other indebtedness,
dividends and other distributions and transactions with affiliates. The SVB Term
Loan also contains financial covenants that require the Company to maintain a
minimum cash balance in accounts maintained at Silicon Valley Bank or one of its
affiliates or else comply with a liquidity ratio and/or a minimum revenue
target.
We were in compliance with all financial covenants under the SVB Term Loan at
Off-Balance Sheet Arrangements and Contractual Obligations
We did not have any off-balance sheet arrangements as ofSeptember 30, 2020 andDecember 31, 2019 . Additionally, there were no material changes to our contractual obligations described in our Annual Report on Form 10-K filed with theSEC onMarch 12, 2020 .
For our contractual obligations that are expected to have an effect on our liquidity and cash flow, see section "Notes to Condensed Consolidated Financial Statements - Note 6 - Commitments and Contingencies" in the condensed consolidated financial statements and "Note 5 - Debt" in the condensed consolidated financial statements.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity withU.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses. We evaluate our estimates and assumptions on an ongoing basis. Our estimates and assumptions are based on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no significant changes to our accounting policies during the nine months endedSeptember 30, 2020 , as compared to the critical accounting policies described in our Annual Report on Form 10-K filed with theSEC onMarch 12, 2020 . We believe that the accounting policies discussed in that Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
Recently Issued and Adopted Accounting Pronouncements
We review new accounting standards to determine the expected financial impact, if any, that the adoption of each new standard will have. For the recently issued and adopted accounting standards that we believe may have an impact on our condensed consolidated financial statements, see the section entitled "Notes to Condensed Consolidated Financial Statements - Note 2 - Summary of Significant Accounting Policies" in the condensed consolidated financial statements.
© Edgar Online, source
