S-1 1 d812636ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
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As filed with the Securities and Exchange Commission on February 13, 2015

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ViewRay Incorporated

(Exact name of Registrant as specified in its charter)

 

Delaware 3845 20-0818429

(State or other jurisdiction of

incorporation or organization)

(Primary Standard Industrial

Classification Code Number)

(I.R.S. Employer

Identification Number)

2 Thermo Fisher Way

Oakwood Village, Ohio 44146

(440) 703-3210

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Chris A. Raanes

President & Chief Executive Officer

ViewRay Incorporated

2 Thermo Fisher Way

Oakwood Village, Ohio 44146

(440) 703-3210

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Mark V. Roeder, Esq.

Brian D. Paulson, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, California 94025

Telephone: (650) 328-4600

D. David Chandler

Chief Financial Officer

ViewRay Incorporated

2 Thermo Fisher Way

Oakwood Village, Ohio 44146

Telephone: (440) 703-3210

Mark B. Weeks, Esq.

John T. McKenna, Esq.

David G. Peinsipp, Esq.

Cooley LLP

3175 Hanover Street

Palo Alto, California 94304

Telephone: (650) 843-5000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate
Offering Price(1)
 

Amount of

Registration Fee

Common Stock, $0.01 par value per share

  $69,000,000   $8,017.80

 

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes shares that the underwriters have the option to purchase.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Dated February 13, 2015

 

 

            Shares

 

LOGO

Common Stock

This is an initial public offering of shares of our common stock. We are offering             shares of common stock. Prior to this offering, there has been no public market for our common stock. We have applied for listing of our common stock on The NASDAQ Global Market under the symbol “VRAY.” We expect that the initial public offering price will be between $         and $         per share.

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements for this prospectus and future filings.

Our business and an investment in our common stock involve significant risks. These risks are described under the caption “Risk Factors” beginning on page 11 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

          Per Share                   Total          

Public offering price

$                 $                

Underwriting discount(1)

$                 $                

Proceeds, before expenses, to ViewRay Incorporated

$                 $                

 

(1) See “Underwriting” for additional information regarding underwriter compensation.

The underwriters may also purchase up to an additional             shares from us at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

The underwriters expect to deliver the shares against payment in New York, New York on or about                     , 2015.

 

 

 

Cowen and Company Stifel

                    , 2015


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LOGO


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TABLE OF CONTENTS

 

    Page  

Prospectus Summary

    1   

Risk Factors

    11   

Special Note Regarding Forward-Looking Statements

    54   

Market, Industry and Other Data

    55   

Use of Proceeds

    56   

Dividend Policy

    57   

Capitalization

    58   

Dilution

    61   

Selected Financial Data

    63   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    65   

Business

    82   

Management

    108   

Executive Compensation

    117   

Certain Relationships and Related Party Transactions

    132   

Principal Stockholders

    140   

Description of Capital Stock

    143   

Shares Eligible for Future Sale

    148   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

    151   

Underwriting

    155   

Legal Matters

    163   

Experts

    163   

Where You Can Find More Information

    163   

Index to Financial Statements

    F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on our behalf. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

ViewRay™, MRIdian™ and our logo are some of our trademarks used in this prospectus. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor to these trademarks and tradenames.


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PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in our common stock and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes before deciding to buy shares of our common stock. Unless the context requires otherwise, references in this prospectus to “ViewRay,” “the company,” “we,” “us” and “our” refer to ViewRay Incorporated.

Overview

We design, manufacture and market MRIdian, the first and only MRI-guided radiation therapy system that images and treats cancer patients simultaneously. Magnetic resonance imaging, or MRI, is a broadly used imaging tool which has the ability to differentiate between types of soft tissue clearly, unlike X-ray or computed tomography, or CT, which are the most commonly used imaging technologies in radiation therapy today. MRIdian integrates MRI technology, radiation delivery and our proprietary software to locate, target and track the position and shape of soft-tissue tumors while radiation is delivered. These capabilities allow MRIdian to deliver radiation to the tumor accurately while delivering less radiation to healthy tissue than existing radiation therapy treatments. We believe this leads to improved patient outcomes and reduced side effects from off-target radiation delivery. Physicians have used MRIdian to treat a broad spectrum of radiation therapy patients with more than 20 different types of cancer, as well as patients for whom radiation therapy was previously not an option.

We received 510(k) marketing clearance from the U.S. Food and Drug Administration, or FDA, for MRIdian in May 2012 and received permission to affix the CE mark in November 2014. Patients are actively receiving treatment on MRIdian systems at three cancer centers located at Washington University in St. Louis, University of California, Los Angeles and the University of Wisconsin–Madison. We generated revenue of $3.2 million in 2013 and $5.9 million in the nine months ended September 30, 2014 and had net losses of $27.2 million in 2013 and $24.2 million in the nine months ended September 30, 2014. At September 30, 2014, we had six signed sales contracts for MRIdian systems in backlog with a total value of $32.4 million, of which we expect to recognize approximately 30% to 60% as revenue in 2015. Typically, an order is included in backlog once a written agreement for the delivery of a MRIdian is executed, and we have received a material deposit. We evaluate our backlog at least quarterly to determine if the orders continue to meet our criteria for inclusion in backlog, which include any changes in customer or distributor plans, customer or distributor continued ability to fulfill the order contract and the status of regulatory approval. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Backlog” for additional information regarding our backlog.

Cancer is among the leading causes of death worldwide, accounting for over eight million deaths per year globally. Radiation therapy is a common method used to treat cancer that uses lethal doses of ionizing energy to damage the genetic material in cells. Nearly two-thirds of all cancer patients in the United States will receive some form of radiation therapy during the course of their illness, according to estimates by the American Society for Radiation Oncology.

In 2013, IMV Medical Information Division, Inc. reported that 93% of patients receiving radiation therapy in the United States were treated by an external-beam radiation therapy device called a linear

 

 

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accelerator, or linac. The global linac market was $2.8 billion in 2011 and was expected to grow to $3.7 billion by 2016, according to a 2012 Markets and Markets report. IAEA Human Health Campus reports that there are over 11,000 linacs installed at over 7,500 centers worldwide. We believe the addressable market for MRIdian is the annual market for linacs due to its ability to treat a broad spectrum of disease sites. However, we believe that MRIdian may be used more frequently for complex cancer cases that may be difficult to treat on a standard linac due to the location of the tumor in relation to the surrounding soft tissues. We currently estimate the annual market for linacs to be 1,100 units per year globally, the majority of which are replacement units.

Current Radiation Therapy Process and Limitations

We believe the key limitations of existing radiation therapy technologies are the following:

 

  n   Inability to accurately locate a tumor for treatment alignment. To locate a tumor, current radiation therapy systems rely on on-table CT scans that are unable to differentiate between types of soft tissue. Therefore, surrogate registration markers, including existing bone structures, external marks and surgically implanted fiducials, are frequently used to align a patient to the treatment beams prior to commencing treatment. By relying on a proxy for tumor location rather than the tumor itself, clinicians risk missing the tumor and risk hitting healthy tissue when they deliver treatment beams into a patient’s body because the spatial relationship between the tumor, healthy tissues and these markers frequently changes.

 

  n   Inability to adapt treatment on table. A physician designs a treatment plan based on images that are captured at the beginning of therapy. Creating a treatment plan can take one to two weeks, and treatment itself can take up to seven weeks. However, during the course of therapy, tumors often change size, orientation or shape and patient anatomy can change for reasons including weight loss or gain. Adjusting for these changes would require replanning, which may take several days and is resource intensive. As a result of these limitations, replanning is infrequently performed.

 

  n   Inability to track tumor and organ motion accurately. In addition to difficulty locating a tumor accurately in a patient’s body, a further challenge is accounting for ongoing tumor movement during treatment. Tumors have been shown to move multiple centimeters relative to surrogate registration markers over the course of only a few seconds. Although physicians use internal markers and external cameras and blocks to track respiratory and other motion, they are unable to track the tumor itself and its location relative to other soft tissues. This limitation increases the probability of missing the targeted treatment area. As a result, physicians usually enlarge the total region to be radiated, causing an additional risk of side effects.

 

  n   Inability to record cumulative radiation delivered. Currently, there are no methods to record the actual dose of radiation delivered to a tumor or surrounding healthy tissue during the course of treatment. Therefore, physicians must assume that the radiation is delivered according to plan, rather than making decisions based on actual dose delivered.

Each of these limitations increases the risk of missing a tumor and hitting healthy tissue during treatment. If a tumor is insufficiently irradiated, it may not respond to treatment, resulting in a lower probability of survival for the patient. If organs and other healthy soft tissues are irradiated, side effects can be severe, including organ failure and secondary cancers.

 

 

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Our Solution

We have developed MRIdian to address the key limitations of existing radiation therapy technologies. We believe that MRIdian provides the following clinical and commercial benefits to physicians, hospitals and patients:

 

  n   Improved tumor visibility and patient alignment. The soft-tissue contrast of MRIdian’s on-board MRI enables clinicians to locate, target and track the tumor and healthy tissues and accurately align a patient to the treatment beams without the use of surrogate registration markers, X-rays or CT.

 

  n   On-table adaptive planning. Using an MR image captured at the beginning of each therapy session, MRIdian automatically maps the patient’s soft tissue anatomy in 3D and calculates the dose that would be delivered using the current treatment plan. If the initial prescribed treatment is not clinically acceptable to the physician, MRIdian has the ability to automatically recalculate and adapt the plan to changing anatomy while the patient is on the table at the time of treatment, a capability unique to MRIdian. We believe hospitals will be able to bill incrementally for this replanning.

 

  n   Ability to track tumors and manage patient motion. MRIdian can capture multiple soft-tissue imaging planes concurrently during treatment and refresh the image multiple times per second. This real-time imaging enables the physician to track the movement of the tumor and the surrounding healthy tissue as treatment is delivered. If a tumor or critical organ moves beyond a physician-defined boundary, the treatment beam automatically pauses. This beam control becomes especially important in the situations where a tumor may be in close proximity to a critical organ.

 

  n   Record and evaluate the delivered dose. After each treatment MRIdian, calculates the dose delivered using a proprietary algorithm and advanced MR imaging, enabling the physician to review and re-optimize the patient’s treatment sessions if needed.

 

  n   Fits into existing treatment paradigms and workflow. MRIdian can be used with standard planning methodologies and is used to treat a broad spectrum of disease sites. In addition, we believe MRIdian’s increased target accuracy will allow physicians to treat with higher doses over fewer treatment fractions and potentially improve patient throughput and efficiency. MRIdian fits inside most standard radiation therapy vaults without significant modifications and is supported by existing codes that are available for linac reimbursement.

We believe the ability to image with MRI and treat cancer patients simultaneously will lead to improved patient outcomes and reduced side effects from off-target radiation delivery.

Our Strategy

Our objective is to make MRI-guided radiation delivery the standard of care for radiation therapy. To achieve this goal, we intend to do the following:

 

  n   target top-tier hospitals in initial global sales efforts to influence and increase market adoption;

 

  n   commercialize MRIdian with a targeted sales force in the United States and through distributors in international markets;

 

  n   increase broader awareness of MRIdian’s capabilities to expand our share of the radiation therapy market;

 

  n   maintain our competitive lead in MRI-guided radiation therapy through continued innovation;

 

 

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  n   continue to work with leading hospitals to optimize efficiency and patient throughput; and

 

  n   drive cost reductions in the design and manufacture of MRIdian and improve our margins.

Risks Associated with Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

  n   We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future.

 

  n   If clinicians do not widely adopt MRI-guided radiation therapy or MRIdian fails to achieve and sustain sufficient market acceptance, we will not generate sufficient revenue and our growth prospects, financial condition and results of operations could be harmed.

 

  n   We may not be able to generate sufficient revenue from the commercialization of MRIdian to achieve and maintain profitability.

 

  n   We are an early, commercial-stage company and have a limited history commercializing MRIdian, which may make it difficult to evaluate our current business and predict our future performance.

 

  n   If third-party payors do not provide coverage and adequate reimbursement to our customers, it could negatively impact sales of MRIdian.

 

  n   The long sales cycle and low unit volume sales of MRIdian, as well as other factors, may contribute to substantial fluctuations in our operating results and stock price and make it difficult to compare our results of operations across periods.

 

  n   Our ability to achieve and maintain profitability depends substantially on increasing our gross margins by reducing product costs and improving our economies of scale, which we may not be able to achieve or sustain.

 

  n   We face competition from numerous companies, many of whom have greater resources than we do or offer alternative technologies at lower prices than our MRIdian systems, which may make it more difficult for us to achieve significant market penetration and profitability.

 

  n   We rely on a limited number of third-party suppliers or, in some cases, sole suppliers, for the majority of our components, subassemblies and materials and may not be able to find replacements or immediately transition to alternative suppliers.

 

  n   We depend on third-party distributors to market and distribute MRIdian in international markets. If our distributors fail to successfully market and distribute MRIdian, our business will be harmed.

 

  n   We may need to raise additional capital to fund our existing commercial operations, develop and commercialize new features for MRIdian and new products and expand our operations.

 

  n   If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect MRIdian, others could compete against us more directly, which could harm our business, financial condition and results of operations.

 

 

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Corporate Information

We commenced operations as a Florida corporation in 2004 and subsequently reincorporated in Delaware in 2007. Our principal executive offices are located at 2 Thermo Fisher Way, Oakwood Village, Ohio 44146, and our telephone number is (440) 703-3210. Our website address is www.viewray.com. The information contained in, or that can be accessed through, our website is not part of this prospectus. You should not rely on any such information in making your decisions whether to purchase our common stock.

Implications of Being an Emerging Growth Company

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of the last day of the year following the fifth anniversary of the consummation of this offering, the last day of the year in which we have total annual gross revenue of at least $1.0 billion, the date on which we are deemed to be a large accelerated filer (this means the market value of our common stock that is held by non-affiliates exceeds $700 million at the end of the second quarter of that year), or the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company, we will:

 

  n   avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

  n   provide less extensive disclosure about our executive compensation arrangements; and

 

  n   not be required to hold stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.

However, we are choosing to “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

 

Common stock to be outstanding immediately after this offering

             shares, or             shares if the underwriters exercise their option to purchase additional shares in full.

 

Underwriters’ option to purchase additional shares

             shares

 

Use of proceeds

We estimate that the net proceeds from this offering will be approximately $             million, or approximately $             million if the underwriters exercise their option to purchase additional shares in full, at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. We currently intend to use the net proceeds we receive from this offering to support the ongoing commercialization of MRIdian, including sales and marketing activities, manufacturing and supply chain management, installation, customer support and product quality, for research and development related to continued product development activities and for general corporate purposes, including working capital. See the section titled “Use of Proceeds” on page 56 for a more complete description of the intended use of proceeds from this offering.

 

Risk factors

See the section titled “Risk Factors” beginning on page 11 and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.

 

Proposed NASDAQ Global Market symbol

“VRAY”

The number of shares of common stock to be outstanding after this offering is based on              shares of common stock outstanding at September 30, 2014 and excludes the following:

 

  n   10,173,484 shares of common stock issuable upon the exercise of outstanding stock options at September 30, 2014, with a weighted-average exercise price of $0.30 per share;

 

  n   312,500 shares of common stock issuable upon the exercise of an outstanding convertible preferred stock warrant at September 30, 2014, with an exercise price of $2.40 per share;

 

  n   899,351 shares of common stock reserved for issuance pursuant to future awards under the 2008 Stock Option and Incentive Plan at September 30, 2014, which will become available for issuance under the 2015 Equity Incentive Award Plan after consummation of this offering; and

 

 

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  n                shares of common stock reserved for issuance pursuant to future awards under the 2015 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective immediately prior to the consummation of this offering.

Unless otherwise indicated, the number of shares of common stock described above gives effect to:

 

  n   the conversion of all outstanding shares of convertible preferred stock into an aggregate of 61,010,026 shares of common stock immediately prior to the consummation of this offering;

 

  n   the issuance and conversion of the principal and accrued interest of convertible notes into shares of common stock immediately prior to the consummation of this offering, based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus;

 

  n   no exercise by the underwriters of their right to purchase up to an additional              shares of common stock to cover overallotments; and

 

  n   the filing and effectiveness of our amended and restated certificate of incorporation and adoption of amended and restated bylaws immediately prior to the consummation of this offering.

We refer to our Series A, Series B, Series B-1, Series C, Series D-1 and Series D-2 convertible preferred stock collectively as “convertible preferred stock.”

 

 

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SUMMARY FINANCIAL DATA

The following tables summarize our historical financial data for the periods indicated. We derived the summary statements of operations data for the years ended December 31, 2012 and 2013 from our audited financial statements included elsewhere in this prospectus. We derived the summary statements of operations data for the nine months ended September 30, 2013 and 2014 and our balance sheet data at September 30, 2014 from our unaudited interim financial statements included elsewhere in this prospectus. The unaudited interim financial statements reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair presentation of the unaudited interim financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results in the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the full year. You should read this summary financial data together with our financial statements and related notes included elsewhere in this prospectus and the information set forth in sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    Year Ended
December 31,
    Nine Months Ended
September 30,
 
    2012     2013     2013     2014  
          (unaudited)  
    (in thousands, except share and per share amounts)  

Statements of Operations Data:

       

Revenue:

   

Product

  $      $ 2,253      $      $ 5,702   

Service

           12               229   

Grant

    1,854        894        894          
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,854        3,159        894        5,931   

Cost of revenue:

       

Product

    3,714        8,173        3,638        7,858   

Service

           14               413   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    3,714        8,187        3,638        8,271   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    (1,860     (5,028     (2,744     (2,340

Operating expenses:

       

Research and development(1)

    8,159        8,780        6,450        7,451   

Selling and marketing(1)

    3,096        3,781        2,697        3,572   

General and administrative(1)

    6,422        9,508        7,114        9,395   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,677        22,069        16,261        20,418   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (19,537     (27,097     (19,005     (22,758

Interest income

    11        4        4        1   

Interest expense

    (181     (97     (11     (1,505

Other income (expense), net

           (32     (10     82   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (19,707     (27,222     (19,022     (24,180

Provision for income taxes

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (19,707   $ (27,222   $ (19,022   $ (24,180
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year Ended
December 31,
    Nine Months Ended
September 30,
 
    2012     2013     2013     2014  
          (unaudited)  
    (in thousands, except share and per share amounts)  

Cumulative dividends on convertible preferred stock

  $ (5,424   $ (2,898   $ (2,898   $   

Deemed capital contribution on conversion of Series C convertible preferred stock into common stock

           8,783        8,783          

Deemed dividend on convertible preferred stock extinguishment

           (6,863     (6,863       

Deemed capital contribution on repurchase of Series A convertible preferred stock

                         9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (25,131   $ (28,200   $ (20,000   $ (24,171
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (14.62   $ (14.19   $ (10.34   $ (11.18
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares used in computing net loss per share attributable to common stockholders, basic and diluted(2)

    1,718,692        1,986,966        1,934,824        2,162,359   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

    $ (0.53     $                
   

 

 

     

 

 

 

Weighted-average common shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

      52,923,624       
   

 

 

     

 

 

 

 

(1) Includes stock-based compensation expense as follows:

 

    Year Ended
December 31,
     Nine Months Ended
September 30,
 
            2012                      2013                      2013                      2014          
                  (unaudited)  
    (in thousands)  

Research and development

  $ 40       $ 29       $ 22       $ 70   

Selling and marketing

    7         9         7         11   

General and administrative

    72         181         151         181   
 

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

  $ 119       $ 219       $ 180       $ 262   
 

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 14 to our audited financial statements for an explanation of the method used to calculate actual and pro forma basic and diluted net loss per share attributable to common stockholders.

 

 

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The table below presents our balance sheet data at September 30, 2014 on:

 

  n   an actual basis;

 

  n   a pro forma basis to give effect to:

 

  n   the conversion of all outstanding shares of convertible preferred stock at September 30, 2014 into an aggregate of 61,010,026 shares of common stock immediately prior to the consummation of this offering;

 

  n   the issuance and conversion of the principal and accrued interest of convertible notes into              shares of common stock immediately prior to the consummation of this offering, based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus; and

 

  n   the reclassification of the convertible preferred stock warrant liability into additional paid-in capital; and

 

  n   a pro forma as adjusted basis to give further effect to the pro forma adjustments set forth above and the sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.

 

    At September 30, 2014  
    Actual     Pro
Forma
    Pro Forma
As Adjusted(1)
 
    (unaudited)  
    (in thousands)  

Balance Sheet Data:

     

Cash and cash equivalents

  $ 1,713      $ 1,713      $                    

Total assets

    19,879        19,879     

Deferred revenue, current and noncurrent portion

    1,008        1,008     

Convertible notes

    3,904            

Long-term debt, current and noncurrent portion

    14,522        14,522     

Total liabilities

    30,926        26,938     

Convertible preferred stock warrant liability

    84            

Convertible preferred stock

    130,012            

Total stockholders’ (deficit) equity

    (141,059     (7,059  

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents, total assets and total stockholders’ (deficit) equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) cash and cash equivalents, total assets and total stockholders’ (deficit) equity by approximately $             million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discount.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus and any related free writing prospectus, including our financial statements and related notes and section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and prospects. In such an event, the price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Related to Our Business and Strategy

We have incurred significant losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. These factors raise substantial doubt about our ability to continue as a going concern.

We have historically incurred substantial net losses, including net losses of $19.7 million and $27.2 million during the years ended December 31, 2012 and December 31, 2013, respectively, and $19.0 million and $24.2 million during the nine months ended September 30, 2013 and September 30, 2014, respectively. We expect our net losses to continue as a result of ongoing expansion of our commercial operations, including increased manufacturing, sales and marketing costs. These net losses have had, and will continue to have, a negative impact on our working capital, total assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our inability to achieve and then maintain profitability could harm our business, financial condition, results of operations and cash flows.

Further, the net losses we incur may fluctuate significantly from quarter-to-quarter and year-to-year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance quarter-to-quarter and year-to-year, due to factors including the timing of clinical trials, any litigation that we may file or that may be filed against us, the execution of collaboration, licensing or other agreements and the timing of any payments we make or receive thereunder. These factors raise substantial doubt about our ability to continue as a going concern.

Our independent registered public accounting firm has issued an opinion on our 2013 financial statements that included an explanatory paragraph referring to our ability to continue as a going concern. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty. We believe that the successful consummation of this offering will eliminate the doubt and enable us to continue as a going concern. However, if we are unable to successfully consummate this offering, we will need to create alternate financing or operational plans to continue as a going concern.

If clinicians do not widely adopt MRI-guided radiation therapy or MRIdian fails to achieve and sustain sufficient market acceptance, we will not generate sufficient revenue and our growth prospects, financial condition and results of operations could be harmed.

Our MRI-guided radiation therapy system, MRIdian, may never gain significant acceptance in the marketplace and, therefore, may never generate substantial revenue or allow us to achieve or maintain profitability. Widespread adoption of MRI-guided radiation therapy depends on many factors, including acceptance by clinicians that MRI-guided radiation therapy is clinically-effective and cost-effective in treating a wide range of cancers, demand by patients for such treatment, successful education of

 

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clinicians on the various aspects of this therapeutic approach and coverage and adequate reimbursement for procedures performed using MRI-guided radiation therapy. If we are not successful in conveying to hospitals that MRI-guided radiation therapy provides equivalent or superior radiation therapy compared to existing technologies, we may experience reluctance or refusal on the part of hospitals to order, and third-party payors to pay for performing, a treatment in which MRIdian is utilized. Our ability to achieve commercial market acceptance for MRIdian or any other future products also depends on the strength of our sales, marketing and distribution organizations. In addition, our expectations regarding cost savings from using MRIdian may not be accurate. These hurdles may make it difficult to demonstrate to physicians, hospitals and other healthcare providers that MRIdian is an appropriate option for radiation therapy, may be superior to available radiation therapy systems and may be more cost-effective than alternative technologies.

Furthermore, we may encounter difficulty in gaining inclusion in cancer treatment guidelines and gaining broad market acceptance by healthcare providers, third-party payors and patients. Healthcare providers may have difficulty in obtaining adequate reimbursement from government and/or third-party payors for cancer treatment, which may negatively impact adoption of MRIdian.

We may not be able to generate sufficient revenue from the commercialization of MRIdian to achieve and maintain profitability.

We rely solely on the commercialization of MRIdian to generate revenue, and we expect to generate substantially all of our revenue in the future from sales of MRIdian. Through September 30, 2014, we have installed only three systems that are currently treating patients. During the nine months ended September 30, 2014, we recognized revenue of $5.9 million from installed MRIdian systems at Washington University and Siteman Cancer Center at Barnes-Jewish Hospital, or Washington University in St. Louis, University of California, Los Angeles Health System and Jonsson Comprehensive Cancer Center, or UCLA, and The University of Wisconsin Carbone Cancer Center, or the University of Wisconsin—Madison. In order to successfully commercialize MRIdian, we will need to continue to expand our marketing efforts to develop new relationships and expand existing relationships with customers, to receive clearance or approval for MRIdian in additional countries, to achieve and maintain compliance with all applicable regulatory requirements and to develop and commercialize new features for MRIdian. We cannot assure you that we will be able to achieve or maintain profitability. If we fail to successfully commercialize MRIdian, we may never receive a return on the substantial investments in product development, sales and marketing, regulatory compliance, manufacturing and quality assurance we have made, as well as further investments we intend to make, which may cause us to fail to generate revenue and gain economies of scale from such investments.

In addition, potential customers may decide not to purchase MRIdian, or our customers may decide to cancel orders due to changes in treatment offerings, research and product development plans, difficulties in obtaining coverage or reimbursement for MRI-guided radiation therapy treatment, complications with facility build-outs, utilization of MRI-guided radiation therapy or other cancer treatment methods developed by other parties, lack of financing or the inability to obtain or delay in obtaining a certificate of need from state regulatory agencies or zoning restrictions, all of which are circumstances outside of our control.

In addition, demand for MRIdian systems may not increase as quickly as we predict, and we may be unable to increase our revenue levels as we expect. Even if we succeed in increasing adoption of MRIdian systems by hospitals and other healthcare providers, maintaining and creating relationships with our existing and new customers and developing and commercializing new features for MRIdian, we may not be able to generate sufficient revenue to achieve or maintain profitability.

 

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We are an early, commercial-stage company and have a limited history commercializing MRIdian, which may make it difficult to evaluate our current business and predict our future performance.

We are an early, commercial-stage company and have a limited operating history. We commenced operations as a Florida corporation in 2004 and subsequently reincorporated in Delaware in 2007. However, we did not begin commercial operations until 2013. Our limited history commercializing MRIdian may make it difficult to evaluate our current business and predict our future performance. Any assessment of our profitability or prediction about our future success or viability is subject to significant uncertainty. We have encountered and will continue to encounter risks and difficulties frequently experienced by early, commercial-stage companies in rapidly evolving industries. If we do not address these risks successfully, our business could be harmed.

If MRIdian does not perform as expected, or if we are unable to satisfy customers’ demands for additional product features, our reputation, business and results of operations will suffer.

Our success depends on the market’s confidence that MRIdian can provide reliable, high-quality MRI-guided radiation therapy. There are only three MRIdian systems being used in commercial practice, and therefore we have very few statistics regarding the efficacy or reliability of MRIdian. We believe that our customers are likely to be particularly sensitive to product defects and errors, including functional downtime that limits the number of patients that can be treated using the system or a failure that is costly to repair. For example, in January 2014, we initiated a correction of the system at Washington University in St. Louis due to a defect we identified in an advanced software feature in the treatment planning system of MRIdian. We promptly updated our software to resolve this defect and notified the U.S. Food and Drug Administration, or FDA, of this correction. We cannot assure that similar product defects or other errors will not occur in the future. This could also include the mistreatment of a patient with MRIdian caused by human error on the part of MRIdian’s operators or prescribing physicians or as a result of a machine malfunction. We may be subject to regulatory enforcement action or legal claims arising from any defects or errors that may occur. Any failure of MRIdian to perform as expected could harm our reputation, business and results of operations.

Furthermore, the Cobalt-60 radioactive materials used in MRIdian systems decay over time, which eventually leads to longer treatment times and may have a negative impact on the number of patients a hospital can treat during a day. U.S. regulations require inspection of Cobalt-60 every five years, at which time customers may consider replacing the Cobalt-60 source. This natural decay or a customer’s failure to replace the Cobalt-60 may have a negative impact on MRIdian performance.

In addition, our customers are technologically well informed and at times have specific demands or requests for additional functionality. If we are unable to meet those demands through the development of new features for MRIdian or future products, those new features or products do not function at the level that our customers expect, we are unable to increase throughput as expected or we are unable to obtain regulatory clearance or approval of those new features or products, where applicable, our reputation, business and results of operations could be harmed.

The safety and efficacy of MRIdian for certain uses is not currently supported by long-term clinical data, and MRIdian may therefore be less safe and effective than initially anticipated.

MRIdian has received premarket clearance by the FDA under Section 510(k) of the Federal Food, Drug and Cosmetic Act, or FDCA. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. This process is typically shorter and generally requires the submission of less supporting documentation than the FDA’s premarket approval process and does not always require long-term clinical studies. Additionally, to date, we have not been required to complete long-term clinical studies in connection with the sale of MRIdian outside the United States. As a result, we

 

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currently lack the breadth of published long-term clinical data supporting the efficacy of MRIdian and the benefits it offers that might have been generated in connection with other approval processes. In addition, because MRIdian has only been on the market since 2013, we have limited complication or patient survival rate data with respect to treatment using the system. If future patient studies or clinical testing do not support our belief that MRIdian offers a more advantageous treatment for a wide variety of cancer types, market acceptance of the system could fail to increase or could decrease and our business could be harmed.

If we choose to, or are required to, conduct additional studies, such studies or experience could reduce the rate of coverage and reimbursement by both public and private third-party payors for procedures that are performed with MRIdian, slow the market adoption of our product by physicians, significantly reduce our ability to achieve expected revenues and prevent us from becoming profitable. In addition, if future studies and experience indicate that MRIdian causes unexpected or serious complications or other unforeseen negative effects, we could be subject to mandatory product recalls or suspension or withdrawal of FDA clearance, and our reputation with physicians, patients and healthcare providers may suffer.

There have been instances of patients’ severe injury or death due to either operator misuse or system malfunction with other radiation therapy systems. If our redundant safety systems do not operate as we expect, MRIdian could severely injure or kill a patient. This could result in lawsuits, fines or damage to our reputation.

We may be delayed or prevented from implementing our long-term sales strategy if we fail to educate clinicians and patients about the benefits of MRIdian.

In order to increase revenue, we must increase awareness of the range of benefits that we believe MRIdian offers to both existing and potential customers, primarily cancer clinicians. An important part of our sales strategy involves educating and training clinicians to utilize the entire functionality of MRIdian. In addition, we must further educate clinicians about the ability of MRIdian to treat a wide range of cancer types effectively and efficiently. If clinicians are not properly educated about the use of MRIdian for radiation therapy, they may be unwilling or unable to take advantage of the full range of functionality that we believe MRIdian offers, which could have a negative impact on MRIdian sales. Clinicians may decide that certain tumors can be adequately treated using traditional radiation therapy systems, notwithstanding the benefits of MRIdian. Cobalt-60 systems have historically had certain limitations which have resulted in an increased use of linacs and a decreased use of Cobalt-60 systems. These historical limitations included imprecise radiation dose applications and an unsharp, wide-beam edge. If we do not adequately educate physicians about the functionality of our Cobalt-60 system to address some of the limitations that have affected Cobalt-60 systems, we may be delayed or prevented from implementing our long-term sales strategy. We must also succeed in educating clinicians about the potential for reimbursement for procedures performed using MRIdian. In addition, we need to increase awareness of MRIdian among potential patients, who are increasingly educated about cancer treatment options and therefore impact adoption of new technologies by clinicians. If our efforts to expand sales of MRIdian in the long-term are not successful, our business and results of operations will be harmed.

We may not be able to gain the support of leading hospitals and key opinion leaders, or to publish the results of our clinical trials in peer-reviewed journals, which may make it difficult to establish MRIdian as a standard of care and achieve market acceptance.

Our strategy includes developing relationships with leading hospitals and key opinion leaders in the industry. If these hospitals and key industry thought leaders determine that MRIdian is not clinically effective or that alternative technologies are more effective, or if we encounter difficulty promoting adoption or establishing MRIdian as a standard of care, our ability to achieve market acceptance of MRIdian could be significantly limited.

 

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We believe that publication of scientific and medical results in peer-reviewed journals and presentation of data at leading conferences are critical to the broad adoption of MRIdian. Publication in leading medical journals is subject to a peer-review process, and peer reviewers may not consider the results of studies involving MRIdian sufficiently novel or worthy of publication.

We have a limited history of manufacturing, assembling and installing MRIdian in commercial quantities and may encounter related problems or delays that could result in lost revenue.

The pre-installation manufacturing processes for MRIdian include sourcing components from various third-party suppliers, subassembly, assembly, system integration and testing. We must manufacture and assemble MRIdian in compliance with regulatory requirements and at an acceptable cost in order to achieve and maintain profitability. We have only a limited history of manufacturing, assembling and installing MRIdian and, as a result, we may have difficulty manufacturing, assembling and installing MRIdian in sufficient quantities in a timely manner. To manage our manufacturing and operations with our suppliers, we forecast anticipated product orders and material requirements to predict our inventory needs up to a year in advance and enter into purchase orders on the basis of these requirements. Our limited manufacturing history may not provide us with enough data to accurately predict future component demand and to anticipate our costs effectively.

Further, we have experienced and may in the future experience delays in obtaining components from suppliers and installing our systems at customer sites associated with contractor timing delays, which could impede our ability to manufacture, assemble and install MRIdian on our expected timeline. Alternatively, delays or postponements of scheduled customer installations could lead to excess inventory due to our limited flexibility to postpone or delay component shipments from suppliers. Accordingly, we may encounter difficulties in production of MRIdian, including problems with quality control and assurance, component supply shortages or surpluses, increased costs, shortages of qualified personnel and difficulties associated with compliance with local, state, federal and foreign regulatory requirements. In addition, if we are unable to maintain larger-scale manufacturing capabilities, our ability to generate revenue will also be limited and our reputation could be harmed. If we cannot achieve the required level and quality of production, we may need to make changes in our supply chain or enter into licensing and other arrangements with third parties who possess sufficient manufacturing facilities and capabilities in compliance with regulatory requirements. Even if we outsource necessary production or enter into licensing or other third-party arrangements, the associated cost could reduce our gross margin and harm our financial condition and results of operations.

We have limited experience in marketing and selling MRIdian, and if we are unable to adequately address our customers’ needs, it could negatively impact sales and market acceptance of MRIdian and we may never generate sufficient revenue to achieve or sustain profitability.

We have limited experience in marketing and selling MRIdian. We have only been selling MRIdian since 2013 and our three MRIdian systems installed have only been used for treating patients since early 2014. In addition, MRIdian is a new technology in the radiation therapy systems sector and our future sales will largely depend on our ability to increase our marketing efforts and adequately address our customers’ needs. We believe it is necessary to maintain a sales force that includes sales representatives with specific technical backgrounds that can support our customers’ needs. We will also need to attract and develop sales and marketing personnel with industry expertise. Competition for such employees is intense and we may not be able to attract and retain sufficient personnel to maintain an effective sales and marketing force. If we are unable to adequately address our customers’ needs, it could negatively impact sales and market acceptance of MRIdian and we may never generate sufficient revenue to achieve or sustain profitability.

 

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The long sales cycle and low unit volume sales of MRIdian, as well as other factors, may contribute to substantial fluctuations in our operating results and stock price and make it difficult to compare our results of operations to prior periods and predict future financial results.

Because of the relatively small number of systems we expect to install in any period, each installation of a MRIdian will represent a significant percentage of our revenue for a particular period. Additionally, customer site construction, certificate of need and additional zoning and licensing permits are often required in connection with the sale of a MRIdian, any of which may further delay the installation process. When we are responsible for installing a system, we only recognize revenue from the sale of a MRIdian after the system has been installed and accepted by the customer. When a qualified third party is responsible for the installation, we only recognize revenue when title is transferred. Therefore, if we do not install a MRIdian or transfer title when anticipated, our operating results will vary significantly from our expectations. We have had experiences with customers postponing installation of MRIdian systems due to delays in facility build-outs, which are often lengthy and costly processes for our existing and potential customers. In addition, if our customers delay or cancel purchases, we may be required to modify or terminate contractual arrangements with our suppliers, which may result in the loss of deposits. Due to future fluctuations in revenue and costs, as well as other potential fluctuations, you should not rely upon our operating results in any particular period as an indication of future performance. In addition to the other risks described herein, the following factors may also contribute to these fluctuations:

 

  n   timing of when we are able to recognize revenue associated with sales of MRIdian;

 

  n   actions relating to regulatory matters, including regulatory requirements in some states for a certificate of need prior to the installation of a MRIdian;

 

  n   delays in shipment due to, for example, unanticipated construction delays at customer locations where MRIdian is to be installed, labor disturbances or natural disasters;

 

  n   delays in our manufacturing processes or unexpected manufacturing difficulties;

 

  n   timing of the announcements of contract executions or other customer and commercial developments;

 

  n   timing of the announcement, introduction and delivery of new products or product features by us and by our competitors;

 

  n   timing and level of expenditures associated with expansion of sales and marketing activities and our overall operations;

 

  n   fluctuations in our gross margins and the factors that contribute to such fluctuations, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this prospectus;

 

  n   our ability to effectively execute on our strategic and operating plans;

 

  n   the extent to which MRIdian gains market acceptance and the timing of customer demand for MRIdian;

 

  n   our ability to protect our proprietary rights and defend against third-party challenges;

 

  n   disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services; and

 

  n   changes in third-party coverage and reimbursement, government regulation or in a customer’s ability to obtain financing.

These factors are difficult to forecast and may contribute to fluctuations in our reported revenue and results of operations and variation from our expectations, particularly during the periods in which our sales volume is low. Any such fluctuations in our financial results may cause volatility in our stock price.

 

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Each MRIdian is a major capital equipment item and is subject to a lengthy sales cycle. The time from initial customer contact to execution of a contract can take 18 to 24 months or more. Following execution of a contract, it generally takes nine to 12 months for a customer to customize an existing facility or construct a new vault, which is inclusive of the time from when a customer places the order to when the system is delivered. During this time, facilities support and transitioning, as well as permitting, are typically required, which can take several months. The time required to customize an existing facility, including modifications of a standard vault to accommodate an MRI, is typically three months. If a customer does not have an existing vault available, it may take longer to construct a new vault. Upon the commencement of installation at a customer’s facility, it typically takes two to three months to complete the installation and on-site testing of the system, including the completion of acceptance test procedures. If a small number of customers defer installation of a MRIdian for even a short period, recognition of a significant amount of revenue may be deferred to a subsequent period. Because our operating costs are relatively fixed, our inability to recognize revenue in a particular period may impact our profitability in that period. As a result, the inability to recognize revenue in a particular period may make it difficult to compare our operating results with prior periods. The price of a MRIdian requires a portion of our target customers to obtain outside financing before committing to purchase a MRIdian system. Such financing may be difficult for our customers to obtain in any given period, if at all. The requirement of site-specific modifications or construction may also delay adoption or overall demand. In addition, while we believe that our backlog of orders provides a better measure at any particular point in time of the long-term performance prospects of our business than our operating results for a particular period, investors may attribute significant weight to our operating results for a particular period, which may be volatile and as a result cause fluctuations in our stock price.

A large portion of our revenue in any given reporting period will be derived from a small number of contracts.

Given a significant portion of the purchase price for MRIdian will generally be recognized as revenue in a single reporting period, we expect a small number of contracts in any given reporting period to account for a substantial part of our revenue in any such period, and we expect this trend to continue. Any decrease in revenue from these contracts could harm our operating results. Accordingly, our revenue and results of operations may vary from period to period. We are also subject to credit risk associated with the concentration of our accounts receivable from our customers. If one or more of our customers at any given time were either to terminate their contracts with us, cease doing business with us or to fail to pay us on a timely basis, our business, financial condition and results of operations could be harmed.

The payment structure we use in our customer arrangements may lead to fluctuations in operating cash flows in a given period.

While our customers typically provide a deposit upon entering into a sales contract with us, the substantial majority of the payment owed for a MRIdian is not due until the time of shipment of a MRIdian or following final acceptance by the customer upon installation. If we miss targeted shipments or our customers do not actively work towards completing installation, our receipt of payments and our operating cash flows could be impacted. In addition, if customers do not adhere to our payments terms, our operating cash flows could be impacted in any given period. Due to these fluctuations in operating cash flows and other potential fluctuations, you should not rely upon our operating results in any particular period as an indication of future performance.

Amounts included in backlog may not result in actual revenue and are an uncertain indicator of our future earnings.

We define backlog as the accumulation of all orders for which revenue has not been recognized and we consider valid. The determination of backlog includes, among other factors, our subjective judgment about the likelihood of an order becoming revenue and the regulatory approval required in

 

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the customer’s jurisdiction, if any. Our judgments in this area have been, and in the future may be, incorrect and we cannot assure you that, for any order included in backlog, we will recognize revenue with respect to such order. In addition, orders can be delayed for a number of reasons, many of which are beyond our control, including supplier delays which may cause delays in our manufacturing process, customer delays in commencing or completing construction of its facility, delays in obtaining zoning or other approvals and delays in obtaining financing. We may not be aware of these delays affecting our suppliers and customers and as a result may not consider them when evaluating the contemporaneous effect on backlog. Moreover, orders generally do not have firm dates by when a customer must take delivery, which could allow a customer to delay the order without cancelling the contract. Further, our backlog could be reduced due to cancellation of orders by customers. Should a cancellation occur, our backlog and anticipated revenue would be reduced unless we were able to replace such order. Reported reductions in our backlog could negatively impact our future results of operations or the price of our common stock.

We evaluate our backlog at least quarterly to determine if the orders continue to meet our criteria for inclusion in backlog. Our criteria include an outstanding and effective written agreement for the delivery of a MRIdian, any changes in customer or distributor plans, the customer’s or distributor’s continued ability to fulfill the order contract and the status of regulatory approval. We may adjust our reported backlog as a result of these factors and due to changes in our judgment about the timing of shipment of a system for particular projects or the status of our regulatory approval in a particular jurisdiction, where applicable. Projects we once categorized as included within our backlog may be removed if we determine, based on the aforementioned criteria, that a particular order or orders no longer constitute valid backlog. In addition, one or more of our contracts have in the past and may in the future contribute to a material portion of our backlog in any one year. Because revenue will not be recognized until we have fulfilled our obligations to a customer, there may be a significant amount of time from signing a contract with a customer or shipping a system and revenue recognition. We cannot assure you that our backlog will result in revenue on a timely basis or at all, or that any cancelled contracts will be replaced.

Our ability to achieve profitability depends substantially on increasing our gross margins by reducing costs of MRIdian and improving our economies of scale, which we may not be able to achieve.

We are not, and never have been, profitable. The MRIdian purchase contracts we have entered into to date have been at a range of selling prices. Generally, earlier contracts have been at lower prices and more recent contracts have been at higher prices. Our earlier contracts resulted in negative gross margins. In order to become profitable we will need to be able to enter into contracts at increased prices. Our intention is to enter into purchase contracts for MRIdian systems with selling prices that are increasingly closer to our list price of a MRIdian. Our ability to enter into contracts at higher selling prices depends on a number of factors including:

 

  n   our ability to achieve commercial market acceptance for our system;

 

  n   the pricing of competitors’ cancer therapy systems;

 

  n   availability of coverage and adequate reimbursement by commercial and government payors; and

 

  n   our ability to manufacture and install our systems in a timely and cost-effective manner.

We bear the risk of warranty claims on all products we supply, including equipment and component parts manufactured by third parties. We cannot assure you that we will be successful in claiming recovery under any warranty or indemnity provided to us by our suppliers or vendors in the event of a successful warranty claim against us by a customer or that any recovery from such vendor or supplier would be

 

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adequate. In addition, warranty claims brought by our customers related to third-party components may arise after our ability to bring corresponding warranty claims against such suppliers expires, which could result in additional costs to us. There is a risk that warranty claims made against us will exceed our warranty reserve and our business, financial condition and results of operations could be harmed.

Because our customer contracts provide that our customers commit to purchase a MRIdian for a fixed price, and a MRIdian will generally not be delivered for 11 to 15 months. In some circumstances, delivery can be postponed several months due to customer delays related to construction, vault preparation or concurrent facility expansion, and the cost of product supplies may increase significantly in the intervening time period. In addition, inflation may generally reduce the real value of the purchase price payable upon the achievement of future progress payment milestones. Either of these occurrences could cause our gross margins to decline or cause us to lose money on the sale of a MRIdian.

Moreover, our gross margins may decline in a given period due in part to significant replacement rates for components, resulting in increased warranty expense, negative profit margins on service contracts and customer dissatisfaction. If we are unable to reduce our expenses and improve or maintain quality and reliability, our profitability may be negatively impacted. Additionally, we may face increased demands for compensation from customers who are not satisfied with the quality and reliability of MRIdian, which could increase our service costs or require us to issue credits against future service payments and negatively impact future product sales. For example, we may have to extend a warranty period due to our failure to meet up-time requirements. Even if we are able to implement cost reduction and quality improvement efforts successfully, our service operations may remain unprofitable given the relatively small size and geographic dispersion of our installed base, which prevents us from achieving significant economies of scale for the provision of services. If we are unable to continue to sell MRIdian at increasingly higher prices that result in higher gross margins, we may never become profitable.

We may not be able to develop new products or enhance the capabilities of MRIdian to keep pace with our industry’s rapidly changing technology and customer requirements.

Our industry is characterized by rapid technological changes, new product introductions and enhancements and evolving industry standards. Our business prospects depend on our ability to develop new products and applications for our technology in new markets that develop as a result of technological and scientific advances, while improving the performance and cost-effectiveness of MRIdian. New technologies, techniques or products could emerge that might offer better combinations of price and performance than MRIdian systems. The market for radiation therapy treatment products is characterized by rapid innovation and advancement in technology. It is important that we anticipate changes in technology and market demand, as well as physician, hospital and healthcare provider practices to successfully develop, obtain clearance or approval, if required, and successfully introduce new, enhanced and competitive technologies to meet our prospective customers’ needs on a timely and cost-effective basis. Nevertheless, we must carefully manage our introduction of new products. If potential customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also have excess or obsolete inventory as we transition to new products, and we have no experience in managing product transitions. If we do not successfully innovate and introduce new technology into our anticipated product lines or effectively manage the transitions of our technology to new product offerings, our business, financial condition and results of operations could be harmed.

We face competition from numerous companies, many of whom have greater resources than we do or offer alternative technologies at lower prices than our MRIdian systems, which may make it more difficult for us to achieve significant market penetration and profitability.

The market for radiation therapy equipment is characterized by intense competition and pricing pressure. In particular, we compete with a number of existing therapy equipment companies, including

 

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Elekta AB, Varian Medical Systems, Inc. and Accuray Incorporated. Many of these competitors are large, well-capitalized companies with significantly greater market share and resources than we have. As a result, these companies may be better positioned than we are to spend more aggressively on marketing, sales, intellectual property and other product initiatives and research and development activities. In addition, we may compete with certain MRI-linear accelerator research projects that are currently in development and may be commercialized, including projects by the University of Alberta’s Cross Cancer Institute and a partnership of the University of Sydney, Ingham Institute and the University of Queensland.

Our current competitors or other potential competitors may develop new products for the treatment of cancer at any time. In addition, competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. If we are unable to develop products that compete effectively against the products of existing or future competitors, our future revenue could be negatively impacted. Some of our competitors may compete by changing their pricing model or by lowering the price of their therapy systems. If these competitors’ pricing techniques are effective, it could result in downward pressure on the price of all therapy systems. If we are unable to maintain or increase our selling prices in the face of competition, we may not improve our gross margins.

In addition to the competition that we face from technologies performing similar functions to MRIdian, competition also exists for the limited capital expenditure budgets of our customers. A potential purchaser may be forced to choose between two items of capital equipment. Our ability to compete may also be negatively impacted when purchase decisions are based largely upon price, because MRIdian is a premium-priced system relative to other capital expenditures and alternative radiation therapy technologies. In certain circumstances, a purchaser may decide that an alternative radiation therapy system priced below MRIdian may be sufficient for its patient population given the relative upfront cost savings. In addition to the cost of the MRIdian system, U.S. customers are required to inspect the Cobalt-60 every five years, and our customers may incur significant costs associated with the inspection, replacement and disposal of Cobalt-60.

Negative press regarding MRI-guided radiation therapy for the treatment of cancer could harm our business.

The comparative efficacy and overall benefits of MRI-guided radiation therapy are not yet well understood, particularly with respect to certain types of cancer. These types of reports could negatively impact the market’s acceptance of MRI-guided radiation therapy, and therefore our ability to generate revenue could be negatively impacted.

We may acquire other businesses, form joint ventures or make investments in other companies or technologies that could negatively affect our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

We may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage our proprietary technology and industry experience to expand our offerings or distribution. We have no experience with acquiring other companies and limited experience with forming strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations. Integration of an acquired company also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business. We may

 

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experience losses related to investments in other companies, which could harm our financial condition and results of operations. We may not realize the anticipated benefits of any acquisition, strategic alliance or joint venture.

Foreign acquisitions involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

To finance any acquisitions or joint ventures, we may choose to issue shares of common stock as consideration, which could dilute the ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.

Risks Related to Our Reliance on Third Parties

We rely on a limited number of third-party suppliers and, in some cases, sole suppliers, for the majority of our components, subassemblies and materials and may not be able to find replacements or immediately transition to alternative suppliers.

We rely on several sole suppliers, including Japan Superconductor Technology, Inc., Siemens AG, Best Theratronics Ltd., Manufacturing Sciences Corporation, Tesla Engineering Limited, PEKO Precision Products, Inc., Euromechanics GmbH and Quality Electrodynamics, LLC, for certain components of MRIdian. These sole suppliers, and any of our other suppliers, may be unwilling or unable to supply components of MRIdian to us reliably and at the levels we anticipate or are required by the market. For us to be successful, our suppliers must be able to provide us with products and components in substantial quantities, in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs and on a timely basis. An interruption in our commercial operations could occur if we encounter delays or difficulties in securing these components, and if we cannot then obtain an acceptable substitute. Any such interruption could harm our reputation, business, financial condition and results of operations.

If we are required to transition to new third-party suppliers for certain components of MRIdian, we believe that there are only a few other manufacturers that are currently capable of supplying the necessary components. In addition, the use of components or materials furnished by these alternative suppliers could require us to alter our operations. Furthermore, if we are required to change the manufacturer of a critical component of MRIdian, we will be required to verify that the new manufacturer maintains facilities, procedures and operations that comply with our quality and applicable regulatory requirements, which could further impede our ability to manufacture MRIdian in a timely manner. We currently do not carry inventory for components for more than two or three systems or have open purchase orders for components for more than four or six systems at any given time. Transitioning to a new supplier could be time-consuming and expensive, may result in interruptions in our operations and product delivery, could affect the performance specifications of MRIdian or could require that we modify the design of MRIdian. If the change in manufacturer results in a significant change to MRIdian, a new 510(k) clearance from the FDA or similar international regulatory authorization may be necessary, which could cause substantial delays. The occurrence of any of these events could harm our ability to meet the demand for MRIdian in a timely manner or cost-effectively.

We cannot assure you that we will be able to secure alternative equipment and materials and utilize such equipment and materials without experiencing interruptions in our workflow. If we should encounter delays or difficulties in securing, reconfiguring or revalidating the equipment and components we require for MRIdian, our reputation, business, financial condition and results of operations could be negatively impacted.

 

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We depend on third-party distributors to market and distribute MRIdian in international markets.

A significant portion of our backlog is composed of international sales, and we expect a significant amount of our revenue to come from international sales. We depend on a number of distributors for sales in these international markets, and we have not to date completed the installation of any MRIdian systems internationally. We cannot control the efforts and resources our third-party distributors will devote to marketing MRIdian. Our distributors may not be able to successfully market and sell MRIdian and may not devote sufficient time and resources to support the marketing and selling efforts that enable 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 dispute arises with a distributor or if a distributor is terminated by us or goes out of business, it may take time to locate an alternative distributor, to seek appropriate regulatory approvals and to train such distributor’s personnel to market MRIdian, and our ability to sell and service MRIdian in the region formerly serviced by such terminated distributor could be harmed. Any of our distributors could become insolvent or otherwise become unable to pay amounts owed to us when due. Any of these factors could reduce our revenue from affected international markets, increase our costs in those markets or damage our reputation. In addition, if we are unable to attract additional international distributors, our international revenue may not grow.

Failures by our third-party distributors to timely deliver or properly install MRIdian could harm our reputation.

We rely on arrangements with third-party distributors for sales and installation of MRIdian in international markets. To date, our third-party distributors have not completed the installation of any MRIdian systems internationally. As a result of our reliance on third-party distributors, we may be subject to disruptions and increased costs due to factors beyond our control, including labor strikes, third-party error and other issues. If the services of any of these distributors become unsatisfactory, including the failure of such distributors to properly install MRIdian, we may experience delays in meeting our customers’ product demands and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver, install or service products in a timely manner may damage our reputation and could cause us to lose current or potential customers.

We rely on third parties to store our inventory and to perform spare parts shipping and other logistics functions on our behalf. A failure or disruption with our logistics providers could harm 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 could be negatively harmed.

If third-party payors do not provide coverage and adequate reimbursement to our customers, it could negatively impact sales of MRIdian.

In the United States, hospitals and other healthcare providers who purchase MRIdian generally rely on third-party payors to reimburse all or part of the costs and fees associated with the treatments performed with our system, including the cost of MRIdian. Accordingly, sales of MRIdian depend, in part, on whether coverage and adequate reimbursement for standard planning methodologies are available to our customers from third-party payors, such as government healthcare insurance programs, including the Medicare and Medicaid programs, private insurance plans, health maintenance organizations and preferred provider organizations. In general, third-party payors in the United States have become increasingly cost-conscious, which has limited coverage for, and

 

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reimbursement of, certain procedures such as MRI-guided radiation therapy. Third-party payors have also increased utilization controls related to the use of products such as ours by healthcare providers.

Furthermore, there is no uniform policy on coverage and reimbursement for MRI-guided radiation therapy among third-party payors. Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments that include the use of MRIdian.

The Medicare program is increasingly used as a model for how private payors and other governmental payors develop their coverage and reimbursement policies for medical services and procedures. Medicare coverage of advanced and conventional radiation therapies using MRIdian currently varies depending upon the geographic location in which the services are provided. The Centers for Medicare & Medicaid Services, or CMS, has not adopted national coverage determination for such therapies that would determine coverage nationally. In the absence of such a national coverage determination, Medicare Administrative Contractors, or MACs, with jurisdiction over specific geographic regions have the discretion to determine whether and when the use of MRI-guided radiation therapy will be considered medically necessary and covered in their respective regions. A number of MACs have adopted or proposed local coverage determinations covering MRI-guided radiation therapy. However, these local coverage determinations do not ensure that coverage will be available for MRI-guided radiation therapy for all types of cancer as the coverage policies may limit coverage to only certain types of cancer.

Even if MRI-guided radiation therapy is covered and reimbursed by third-party payors, adverse changes in payors’ coverage and reimbursement policies that affect MRIdian could harm our ability to market and sell MRIdian. We cannot be sure that third-party payors will reimburse our customers for procedures using MRIdian at a level that will enable us to achieve or maintain adequate sales and price levels for MRIdian. Without coverage and adequate reimbursement from third-party payors, the market for MRIdian may be limited.

Third-party payors regularly update reimbursement amounts and also, from time to time, revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and ambulatory surgery centers for the radiation treatments performed with MRIdian. Because the cost of MRIdian generally is recovered by the healthcare provider as part of the payment for performing the treatment and not separately reimbursed, these updates could directly impact the demand for MRIdian. An example of payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula.

Under the Medicare Physician Fee Schedule, or MPFS, rule for 2015, in the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. Most recently, the Protecting Access to Medicare Act of 2014, signed into law in April 2014, provided for a 0.5% update from 2013 payment rates under the MPFS through 2014 and a 0% update from January 1 until April 1, 2015. If Congress fails to intervene to prevent the negative update factor in future years, the resulting decrease in payment may adversely affect our revenues and results of operations.

With respect to hospital payments, in its final rule for the Hospital Outpatient Prospective Payment System, or HOPPS, effective January 1, 2015, CMS will implement changes in the coding system to simplify the billing of conventional radiation therapy performed in the hospital outpatient setting into three levels—simple, intermediate or complex—and to simplify the billing of intensity modulated radiation therapy, or IMRT, into two levels, simple or complex. Simple IMRT treatments (e.g., breast and prostate) may be paid at a lower rate than complex IMRT, which includes all other disease sites. We believe that MRIdian will tend to be used for a higher proportion of complex treatments than other radiation therapy systems, and accordingly, we believe that the new HOPPS rules will have a small impact on our customers.

 

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Any significant cuts in reimbursement rates or changes in reimbursement methodology or administration for MRI-guided radiation therapy, or concerns or proposals regarding further cuts or changes in methodology or administration, could further increase uncertainty, influence our customers’ decisions, reduce demand for MRIdian, cause customers to cancel orders and impact our revenue and harm our business.

Foreign governments also have their own healthcare reimbursement systems, which vary significantly by country and region, and we cannot be sure that adequate reimbursement will be made available with respect to MRIdian under any foreign reimbursement system.

Our employees, consultants and commercial partners may engage in misconduct or other improper activities, including insider trading and non-compliance with regulatory standards and requirements.

We are exposed to the risk that our employees, consultants and commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or disclosure of unauthorized activities to us that violates the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

Risks Related to Our Financial Condition and Capital Requirements

We may need to raise additional capital to fund our existing commercial operations, develop and commercialize new features for MRIdian and new products and expand our operations.

Based on our current business plan, we believe the net proceeds from this offering, together with our current cash and cash equivalents, together with cash receipts from sales of MRIdian systems and net proceeds of this offering, will enable us to conduct our planned operations through at least 2016. If our available cash balances, net proceeds from this offering and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for MRIdian as a result of lower than currently expected rates of reimbursement from commercial third-party payors and government payors or other risks described in this prospectus, we may seek to sell common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.

 

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We may consider raising additional capital in the future to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons, including to:

 

  n   increase our sales and marketing efforts to increase market adoption of MRIdian and address competitive developments;

 

  n   provide for supply and inventory costs associated with plans to accommodate potential increases in demand for MRIdian systems;

 

  n   fund development and marketing efforts of any future products or additional features to then-current products;

 

  n   acquire, license or invest in new technologies;

 

  n   acquire or invest in complementary businesses or assets; and

 

  n   finance capital expenditures and general and administrative expenses.

Our present and future funding requirements will depend on many factors, including:

 

  n   our ability to achieve revenue growth and improve gross margins;

 

  n   our rate of progress in establishing coverage and reimbursement arrangements with domestic and international commercial third-party payors and government payors;

 

  n   the cost of expanding our operations and offerings, including our sales and marketing efforts;

 

  n   our rate of progress in, and cost of the sales and marketing activities associated with, establishing adoption of MRIdian;

 

  n   the cost of research and development activities;

 

  n   the effect of competing technological and market developments;

 

  n   costs related to international expansion; and

 

  n   the potential cost of and delays in product development as a result of any regulatory oversight applicable to MRIdian.

The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also could provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing debt securities, those debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to certain components contained within MRIdian, or grant licenses on terms that are not favorable to us.

We will incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public company compliance programs.

As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission, or SEC, and the NASDAQ Stock Market, or NASDAQ. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel will devote a

 

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substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls could negatively impact the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on NASDAQ.

We are not currently required to comply with the SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not yet required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. We are just beginning the costly and challenging process of compiling the system and processing documentation needed to comply with such requirements. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective.

Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company” as defined in the JOBS Act depending on whether we choose to rely on certain exemptions set forth in the JOBS Act. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which could harm our business.

 

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Compliance with recently adopted rules of the SEC relating to “conflict minerals” may require us and our suppliers to incur substantial expense and may result in disclosure by us that certain minerals used in products we manufacture or contract to manufacture are not “DRC conflict free.”

Section 1502 of the Dodd-Frank Act required the SEC to promulgate rules requiring disclosure by a public company of any “conflict minerals” (tin, tungsten, tantalum and gold) necessary to the functionality or production of a product manufactured or contracted to be manufactured by the public company. The SEC adopted final rules in 2012 that took effect at the end of January 2013. Because we manufacture or contract to manufacture a product that contains tin, tungsten, tantalum or gold, we will be required under these rules to determine whether those minerals are necessary to the functionality or production of MRIdian and, if so, conduct a country of origin inquiry with respect to all such minerals. If any such minerals may have originated in the Democratic Republic of the Congo, or DRC, or any of its adjoining countries, or covered countries, then we must conduct diligence on the source and chain of custody of those conflict minerals to determine if they originated in one of the covered countries and, if so, whether they financed or benefited armed groups in the covered countries. Disclosures relating to the products that may contain conflict minerals, the country of origin of those minerals and whether they are “DRC conflict free” must be provided in a Form SD (and accompanying conflict minerals report, if required, to disclose the diligence undertaken by us in sourcing the minerals and our conclusions relating to such diligence). If we are required to submit a conflict minerals report, after 2015 that report must be audited by an independent auditor pursuant to existing government auditing standards. Compliance with this new disclosure rule may be very time-consuming for management and our supply chain personnel (as well as time-consuming for our suppliers) and could involve the expenditure of significant amounts of money by us and them. Disclosures, mandated by this new rule, which can be perceived by the market to be “negative,” may cause customers to refuse to purchase MRIdian. We cannot assure you that the cost of compliance with the rule will not harm our business, financial condition or results of operations.

Our loan and security agreement with Hercules Technology Growth Capital, Inc. and Hercules Technology III, L.P., or together, Hercules, contains operating and financial covenants that may restrict our business and financing activities.

At September 30, 2014, we had $15 million in outstanding debt to Hercules. Borrowings under our loan and security agreement with Hercules are secured by substantially all of our personal property, including our intellectual property. Our loan and security agreement restricts our ability to, among other things:

 

  n   dispose of or sell our assets;

 

  n   make material changes in our business;

 

  n   merge with or acquire other entities or assets;

 

  n   incur additional indebtedness;

 

  n   create liens on our assets;

 

  n   pay dividends;

 

  n   make investments; and

 

  n   pay off subordinated indebtedness.

The operating and financial restrictions and covenants in our loan and security agreement, as well as any future financing agreements into which we may enter, may restrict our ability to finance our operations and engage in, expand or otherwise pursue our business activities and strategies. Our ability to comply with these covenants may be affected by events beyond our control, and future breaches of any of these covenants could result in a default under our loan and security agreement. If not waived,

 

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future defaults could cause all of the outstanding indebtedness under our loan and security agreement to become immediately due and payable and terminate all commitments to extend further credit.

If we do not have or are unable to generate sufficient cash available to repay our debt obligations when they become due and payable, either upon maturity or in the event of a default, we may not be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our ability to operate and continue our business as a going concern.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

At December 31, 2013, we had federal net operating loss carryforwards, or NOLs, of $92.9 million, which begin to expire in the year ended December 31, 2024, and state NOLs of approximately $0.8 million, which begin to expire in the year ended December 31, 2019. We also had federal research and development tax credit carryforwards of $2.0 million for the year ended December 31, 2013. These credits expire at various dates through the year ending December 31, 2024. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We believe we have experienced at least one ownership change in the past. We are currently analyzing the tax impacts of such ownership change on our federal NOLs and credit carryforwards. Future changes in our stock ownership, including this or future offerings, as well as other changes that may be outside of our control, could result in additional ownership changes under Section 382 of the Code. Our NOLs may also be limited under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future tax benefits of such assets.

We face risks related to the current global economic environment, which could delay or prevent our customers from obtaining financing to purchase MRIdian and implement the required facilities, which could harm 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 customer demand for MRIdian, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors, including financial institutions. If the current global economic environment deteriorates, our business could be negatively affected.

Risks Related to Administrative, Organizational and Commercial Operations and Growth

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

We anticipate growth in our business operations. This future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and customer service, sales force management and general and financial administration. We may not be able to maintain the quality of or installation timelines of MRIdian or satisfy customer demand as it grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. We may implement new enterprise software systems in a number of areas affecting a broad range of business processes and functional areas. The time and resources required to implement these new systems is uncertain and failure to complete this in a timely and efficient manner could harm our business.

 

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If we are unable to support demand for MRIdian and our future products, including ensuring that we have adequate resources to meet increased demand, or we are unable to successfully manage the evolution of our MRI-guided radiation technology, our business could be harmed

As our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. We cannot assure you that any of these increases in scale, expansion of personnel, purchase of equipment or process enhancements will be successfully implemented.

The loss of our President and Chief Executive Officer or Chief Scientific Officer or our inability to attract and retain highly skilled scientists and salespeople could negatively impact our business.

Our success depends on the skills, experience and performance of our President and Chief Executive Officer, Chris A. Raanes, and our Chief Scientific Officer and founder, James F. Dempsey, Ph.D. The individual and collective efforts of these employees will be important as we continue to develop MRIdian and as we expand our commercial activities. The loss or incapacity of existing members of our executive management team could negatively impact our operations if we experience difficulties in hiring qualified successors. Our executive officers have employment agreements; however, the existence of an employment agreement does not guarantee the retention of the executive officer for any period of time.

Our commercial, manufacturing and research and development programs and operations depend on our ability to attract and retain highly skilled engineers, scientists and technicians. We may not be able to attract or retain qualified managers, engineers, scientists and technicians in the future due to the competition for qualified personnel among medical device businesses, particularly in California and Ohio. We also face competition from universities and public and private research institutions in recruiting and retaining highly qualified scientific personnel. Recruiting and retention difficulties can limit our ability to support our commercial, manufacturing and research and development programs. All of our employees are at-will, which means that either we or the employee may terminate his or her employment at any time.

If we were sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.

The marketing, sale and use of MRIdian could lead to the filing of product liability claims were someone to allege that MRIdian did not effectively treat the conditions its users were intending to target, caused other serious medical conditions or otherwise failed to perform as designed. We may also be subject to liability for errors in, a misunderstanding of or inappropriate reliance upon the information we provide in the ordinary course of our business activities, such as customer support or operating instructions. A product liability claim could result in substantial damages and be costly and time-consuming for us to defend.

We maintain product liability insurance in the amount of $6.0 million per occurrence and $6.0 million in the aggregate, but this insurance may not fully protect us from the financial impact of defending against product liability claims. Any product liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could lead to regulatory investigations, product recalls or withdrawals, damage our reputation or cause current vendors, suppliers and customers to terminate existing agreements and potential customers and partners to seek other suppliers of radiation therapy systems, any of which could negatively impact our results of operations.

 

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Sanctions against Russia, and Russia’s response to those sanctions, could harm our business, financial condition and results of operations.

Due to Russia’s recent military intervention in Ukraine and annexation of Crimea, the United States and the European Union, or EU, have imposed sanctions on certain individuals and one financial institution in Russia and have proposed the use of broader economic sanctions. In response, Russia has imposed entry bans on certain U.S. lawmakers and officials. We have engaged a third-party distributor and are currently in discussions with potential customers in Russia. If the United States or the EU were to impose sanctions on Russian businesses, or if Russia were to take retaliatory action against U.S. companies operating in Russia, our sales and marketing efforts in Russia could be harmed.

We face risks associated with our international business.

In addition to our marketing and sales of MRIdian in the United States, we also market MRIdian in North America, Europe and the Pacific Rim, with contracts signed with customers and distributors in Taiwan, Turkey, Korea, China, the United Arab Emirates, Hong Kong, Japan, Italy and Russia. Our international business operations are subject to a variety of risks, including:

 

  n   difficulties in staffing and managing foreign and geographically dispersed operations;

 

  n   having to comply with various U.S. and international laws, including export control laws and the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, and anti-money laundering laws;

 

  n   differing regulatory requirements for obtaining clearances or approvals to market MRIdian;

 

  n   changes in uncertainties relating to foreign rules and regulations that may impact our ability to sell MRIdian, perform services or repatriate profits to the United States;

 

  n   tariffs, export or import restrictions, restrictions on remittances abroad, imposition of duties or taxes that limit our ability to move MRIdian out of these countries or interfere with the import of essential materials into these countries;

 

  n   limitations on our ability to enter into cost-effective arrangements with distributors of MRIdian, or at all;

 

  n   fluctuations in foreign currency exchange rates;

 

  n   imposition of limitations on production, sale or export of MRI-guided radiation therapy systems in foreign countries;

 

  n   imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

 

  n   differing multiple payor reimbursement regimes, government payors or patient self-pay systems;

 

  n   imposition of differing labor laws and standards;

 

  n   economic, political or social instability in foreign countries and regions;

 

  n   an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action; and

 

  n   availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us.

We expect that we will begin expanding into other target markets; however, we cannot assure you that our expansion plans will be realized, or if realized, be successful. We expect each market to have particular regulatory and funding hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If

 

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we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed.

Our results may be impacted by changes in foreign currency exchange rates.

Currently, the majority of our international sales contracts are denominated in U.S. dollars. We pay certain of our suppliers in a foreign currency under the terms of their supply agreements, and we may pay other suppliers in the future in foreign currency. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could require us to reduce our selling price or risk making MRIdian less competitive in international markets or our costs could increase. Also, if our international sales increase, we may enter into a greater number of transactions denominated in non-U.S. dollars, which could expose us to foreign currency risks, including changes in currency exchange rates. We do not currently engage in any hedging transactions. If we are unable to address these risks and challenges effectively, our international operations may not be successful and our business could be harmed.

We could be negatively impacted by violations of applicable anti-corruption laws or violations of our internal policies designed to ensure ethical business practices.

We operate in a number of countries throughout the world, including in countries that do not have as strong a commitment to anti-corruption and ethical behavior that is required by U.S. laws or by corporate policies. We are subject to the risk that we, our U.S. employees or our employees located in other jurisdictions or any third parties such as our sales agents and distributors that we engage to do work on our behalf in foreign countries may take action determined to be in violation of anti-corruption laws in any jurisdiction in which we conduct business, including the FCPA and the Bribery Act of 2010, or the U.K. Anti-Bribery Act. In addition, we operate in certain countries in which the government may take an ownership stake in an enterprise and such government ownership may not be readily apparent, thereby increasing potential anti-corruption law violations. Any violation of the FCPA and U.K. Anti-Bribery Act or any similar anti-corruption law or regulation could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations in certain jurisdictions and might harm our business, financial condition or results of operations. In addition, we have internal ethics policies with which we require our employees to comply in order to ensure that our business is conducted in a manner that our management deems appropriate. If these anti-corruption laws or internal policies were to be violated, our reputation and operations could also be substantially harmed. Further, detecting, investigating and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.

We are subject to export restrictions and laws affecting trade and investments, and the future sale of our MRIdian system may be further limited or prohibited in the future by a government agency or authority.

As a global company headquartered in the United States, our MRIdian system is subject to U.S. laws and regulations that may limit, restrict or require a license to export (and re-export from other countries) our MRIdian system and related product and technical information due to its use of hazardous materials, including Cobalt-60, lead and depleted uranium. We are also subject to the export and import laws of those foreign jurisdictions to which we sell or from which we re-export our MRIdian system. Compliance with these laws and regulations could significantly limit our operations and our sales in the future and failure to comply, even indirectly, could result in a range of penalties, including restrictions on exports of our MRIdian system for a specified time period, or forever, and severe monetary penalties. In certain circumstances, these restrictions may affect our ability to interact with any of our future foreign subsidiaries and otherwise limit our trade with third parties, including suppliers and customers, operating inside and outside the United States. In addition, if we introduce new products, we may need to obtain licenses or approvals from the United States and other governments to ship them into foreign countries. Failure to receive the appropriate approvals may mean that our commercial efforts and expenses related to such efforts may not result in any revenue, which could harm our business.

 

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We depend on our information technology systems, and any failure of these systems could harm our business.

We depend on information technology and telecommunications systems for significant elements of our operations. We have developed propriety software for the management and operation of MRIdian by our customers. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including for example, systems handling human resources, financial controls and reporting, contract management, regulatory compliance and other infrastructure operations. In addition to the aforementioned business systems, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, the network design and the automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including sales and marketing, manufacturing operations, customer service support, billing and reimbursement, research and development activities and general administrative activities.

Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from providing maintenance and support services to our customers, conducting research and development activities and managing the administrative aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could harm our business.

Our operations are vulnerable to interruption or loss due to natural or other disasters, power loss, strikes and other events beyond our control.

We conduct a significant portion of our activities, including administration and data processing, at facilities located in California, Ohio and other areas that have experienced major earthquakes, tornadoes and other natural disasters. A major earthquake, tornado or other disaster (such as a major fire, hurricane, flood, tsunami, volcanic eruption or terrorist attack) affecting our facilities, or those of our suppliers, could significantly disrupt our operations, and delay or prevent product shipment or installation during the time required to repair, rebuild or replace our suppliers’ damaged manufacturing facilities; these delays could be lengthy and costly. If any of our customers’ facilities are negatively impacted by a disaster, shipments of MRIdian could be delayed. Additionally, customers may delay purchases of MRIdian until operations return to normal. Even if we are able to quickly respond to a disaster, the ongoing effects of the disaster could create some uncertainty in the operations of our business. In addition, our facilities may be subject to a shortage of available electrical power and other energy supplies. Any shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business. Further, MRIdian is typically shipped from a limited number of ports, and any disaster, strike or other event blocking shipment from these ports could delay or prevent shipments and harm our business. In addition, concerns about terrorism, the effects of a terrorist attack, political turmoil or an outbreak of epidemic diseases, such as ebola or influenza, could have a negative effect on our operations, those of our suppliers and customers and the ability to travel, which could harm our business, financial condition and results of operations.

 

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Risks Related to Intellectual Property

Litigation or other proceedings or third-party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling MRIdian or impact our stock price.

There is considerable intellectual property litigation and contested patent disputes in the medical device area. Third parties may, in the future, assert claims that we are employing their proprietary technology without authorization, including claims from competitors or from non-practicing entities that have no relevant product revenue and against whom our own patent portfolio may have no deterrent effect. As we continue to commercialize MRIdian in its current or an updated form, launch new products and enter new markets, we expect that competitors may claim that MRIdian infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. Although we are presently unaware of any basis by which a third party would be justified in making such claims, in the future, we may receive letters or other threats or claims from third parties inviting us to take licenses under, or alleging that we infringe, their patents. Third parties may have obtained, and may in the future obtain, patents under which such third parties may claim that the use of our technologies constitutes patent infringement.

Moreover, we may become party to future adversarial proceedings regarding our patent portfolio or the patents of third parties. Such proceedings could include contested post-grant proceedings such as oppositions, inter partes review, reexamination, interference or derivation proceedings before the U.S. Patent and Trademark Office or foreign patent offices. The legal threshold for initiating litigation or contested proceedings is low, so that even lawsuits or proceedings with a low probability of success might be initiated. Litigation and contested proceedings can also be expensive and time-consuming, and our adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we can.

We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims or in any of such proceedings. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have a negative impact on our cash position and stock price. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement or misappropriation against us, we may be required to pay damages, obtain one or more licenses from third parties or be prohibited from selling certain products, all of which could have a negative impact on our cash position, business and financial condition.

In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or adversarial proceeding or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of MRIdian or future products could impact our ability to grow and maintain profitability and harm our business.

If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect MRIdian, others could compete against us more directly, which could harm our business, financial condition and results of operations.

Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary

 

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technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

We hold the exclusive worldwide license for certain patents and applications covering our combination of MRI and radiation therapy technologies. Specifically, we hold a license to two issued U.S. patents, two pending U.S. applications, 13 issued foreign patents (eight of which were issued in Great Britain, Germany, France and the Netherlands as a result of two applications filed and allowed through the European Patent Office) and five pending foreign applications, at November 1, 2014. We own an additional four issued U.S. patents, one issued foreign patent, 15 pending U.S. patent applications and 46 pending foreign patent applications, and at November 1, 2014, three of our U.S. applications and four of our foreign applications were allowed. Assuming all required fees are paid, individual patents or applications owned or licensed by us will expire between 2025 and 2034. We also have a joint ownership interest with Case Western Reserve University in one U.S. patent application.

We cannot provide any assurances that any of our patents have, or that any of our pending patent applications that mature into issued patents will include, claims with a scope sufficient to protect MRIdian, any additional features we develop for MRIdian or any new products. Other parties may have developed technologies that may be related or competitive to our platform, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of medical device companies, including our patent position, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. U.S. patents and patent applications may also be subject to supplemental examination or contested post-grant proceedings such as inter partes review, reexamination, interference or derivation proceedings before the U.S. Patent and Trademark Office and challenges in district court. Patents may be subjected to opposition, post-grant review or comparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize MRIdian.

Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If any of these developments were to occur, they each could have a negative impact on our sales.

Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

 

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In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering MRIdian are invalidated or found unenforceable, our financial position and results of operations could be negatively impacted. In addition, if a court found that valid, enforceable patents held by third parties covered MRIdian, our financial position and results of operations could be harmed.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

 

  n   any of our patents, or any of our pending patent applications, if issued, will include claims having a scope sufficient to protect MRIdian or any other products;

 

  n   any of our pending patent applications will issue as patents;

 

  n   we will be able to successfully commercialize MRIdian on a substantial scale, if approved, before our relevant patents expire;

 

  n   we were the first to make the inventions covered by each of our patents and pending patent applications;

 

  n   we were the first to file patent applications for these inventions;

 

  n   others will not develop similar or alternative technologies that do not infringe our patents;

 

  n   any of our patents will be found to ultimately be valid and enforceable;

 

  n   any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

 

  n   we will develop additional proprietary technologies or products that are separately patentable; or

 

  n   our commercial activities or products will not infringe upon the patents of others.

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

If we are not able to meet the requirements of our license agreement with the University of Florida Research Foundation, Inc., we could lose access to the technologies licensed thereunder and be unable to manufacture, market or sell MRIdian.

We license patents and patent applications from the University of Florida Research Foundation, Inc., or UFRF, covering our combination of MRI and radiation therapy, and other key technologies, incorporated into MRIdian under a license agreement that requires us to pay royalties to UFRF. 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. The license agreement terminates when the underlying patents expire in 2025, although UFRF has the right to unilaterally terminate the agreement if we do not meet our royalty payment obligations, including

 

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minimum royalty payments of $50 thousand per quarter, or if we fail to satisfy other development and commercialization obligations related to our utilization of the technology. If UFRF were to terminate the agreement or if we were to otherwise lose the ability to exploit the licensed patents, our competitive advantage could be reduced, we may not be able to find a source to replace the licensed technology and we may be prevented from selling MRIdian. The license agreement reserves to UFRF the initial right to defend or prosecute any claim arising with respect to the licensed technology. If UFRF 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 harm our business, financial condition and results of operations.

Recent changes in U.S. patent laws may limit our ability to obtain, defend or enforce our patents.

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The United States Patent Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, only became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.

However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for companies to challenge the validity of competitor patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could therefore increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them. Moreover, if such challenges occur with regard to our UFRF-licensed patents, as indicated above, we have only limited rights to control the defense.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.

In addition to patent protection, we also rely upon copyright and trade secret protection, as well as non-disclosure agreements and invention assignment agreements with our employees, consultants and third parties, to protect our confidential and proprietary information. For example, significant elements of MRIdian are based on unpatented trade secrets and know-how that are not publicly disclosed. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that

 

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could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed.

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.

Third parties may assert ownership or commercial rights to inventions we develop.

Third parties may in the future make claims challenging the inventorship or ownership of our intellectual property. We have written agreements with collaborators that provide for the ownership of intellectual property arising from our collaborations. These agreements provide that we must negotiate certain commercial rights with collaborators with respect to joint inventions or inventions made by our collaborators that arise from the results of the collaboration. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise from a collaboration. If we cannot successfully negotiate sufficient ownership and commercial rights to the inventions that result from our use of a third-party collaborator’s materials where required, or if disputes otherwise arise with respect to the intellectual property developed with the use of a collaborator’s technology, we may be limited in our ability to capitalize on the market potential of these intellectual property rights. In addition, we may face claims by third parties that our agreements with employees, contractors or consultants obligating them to assign intellectual property to us are ineffective or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes regarding intellectual property we have developed or will develop and interfere with our ability to capture the commercial value of such intellectual property. Litigation may be necessary to resolve an ownership dispute, and if we are not successful, we may be precluded from using certain intellectual property or may lose our exclusive rights in that intellectual property. Either outcome could harm our business.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who were previously employed at universities or other medical device companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other

 

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proprietary information, of a former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

Risks Related to Regulatory Matters

MRIdian and our operations are subject to extensive government regulation and oversight both in the United States and abroad, and our failure to comply with applicable requirements could harm our business.

MRIdian is a medical device that is subject to extensive regulation in the United States and elsewhere, including by the FDA and its foreign counterparts. The FDA and foreign regulatory agencies regulate, among other things, with respect to medical devices:

 

  n   design, development and manufacturing;

 

  n   testing, labeling, content and language of instructions for use and storage;

 

  n   clinical trials;

 

  n   product safety;

 

  n   marketing, sales and distribution;

 

  n   premarket clearance and approval;

 

  n   record keeping procedures;

 

  n   advertising and promotion;

 

  n   recalls and field safety corrective actions;

 

  n   post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury;

 

  n   post-market approval studies; and

 

  n   product import and export.

The regulations to which we are subject are complex and have tended to become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.

In the United States, before we can market a new medical device, or a new use of, new claim for or significant modification to an existing product, we must first receive either clearance under Section 510(k) of the FDCA or approval of a premarket approval, or PMA, application from the FDA, unless an exemption applies. In the 510(k) clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, in order to clear the proposed device for marketing. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data are sometimes required to support substantial equivalence. In the PMA process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. The PMA process is typically required for devices that are deemed to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices.

 

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Modifications to products that are approved through a PMA application generally require FDA approval. Similarly, certain modifications made to products cleared through a 510(k) may require a new 510(k) clearance. Both the PMA approval and the 510(k) clearance process can be expensive, lengthy and uncertain. The FDA’s 510(k) clearance process usually takes from three to 12 months, but can last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is filed with the FDA. In addition, PMA generally requires the performance of one or more clinical trials. Despite the time, effort and cost, we cannot assure you that any particular device will be approved or cleared by the FDA. Any delay or failure to obtain necessary regulatory approvals could harm our business.

In the United States, we have obtained 510(k) premarket clearance from the FDA to market MRIdian for the provision of stereotactic radiosurgery and precision radiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment is indicated. An element of our strategy is to continue to upgrade MRIdian to incorporate new software and hardware enhancements. We expect that such upgrades, as well as other future modifications to MRIdian, may require new 510(k) clearance; however, future upgrades may be subject to the substantially more costly, time-consuming and uncertain PMA process. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, product introductions or modifications could be delayed or canceled, which could cause our sales to decline.

The FDA can delay, limit or deny clearance or approval of a device for many reasons, including:

 

  n   we may not be able to demonstrate to the FDA’s satisfaction that MRIdian is substantially equivalent to the proposed predicate device or safe and effective for its intended use;

 

  n   the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval, where required; and

 

  n   the manufacturing process or facilities we use may not meet applicable requirements.

In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions, which may prevent or delay approval or clearance of our future products under development or impact our ability to modify our currently cleared product on a timely basis. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) clearance process, the FDA initiated an evaluation, and in January 2011, announced several proposed actions intended to reform the clearance process. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval. Some of these proposals and reforms could impose additional regulatory requirements upon us that could delay our ability to obtain new 510(k) clearances, increase the costs of compliance or restrict our ability to maintain our current clearances.

Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations. The failure to comply with applicable regulations could jeopardize our ability to sell MRIdian and result in enforcement actions such as:

 

  n   warning letters;

 

  n   fines;

 

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  n   injunctions;

 

  n   civil penalties;

 

  n   termination of distribution;

 

  n   recalls or seizures of products;

 

  n   delays in the introduction of products into the market;

 

  n   total or partial suspension of production;

 

  n   refusal to grant future clearances or approvals;

 

  n   withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of MRIdian; and

 

  n   in the most serious cases, criminal penalties.

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and harm our reputation, business, financial condition and results of operations.

In order to sell MRIdian in member countries of the European Economic Area, or EEA, MRIdian must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Compliance with these requirements is a prerequisite to be able to affix the Conformité Européene, or CE, mark to MRIdian, without which they cannot be sold or marketed in the EEA. To demonstrate compliance with the essential requirements we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low-risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the EU Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, or a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

As a general rule, demonstration of conformity of medical devices and their manufacturers with the essential requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use, that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. We received the CE mark for MRIdian in November 2014. If we fail to remain in compliance with applicable European laws and directives, we would not be able to continue to affix the CE mark to MRIdian, which would prevent us from selling MRIdian within the EEA. We will also need to obtain regulatory approval in other foreign jurisdictions in which we plan to market and sell MRIdian.

 

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Modifications to MRIdian and our future products may require new 510(k) clearances or PMA approvals, or may require us to cease marketing or recall the modified products until clearances are obtained.

In the United States, we have obtained 510(k) premarket clearance from the FDA to market MRIdian for the provision of stereotactic radiosurgery and precision radiotherapy for lesions, tumors and conditions anywhere in the body where radiation treatment is indicated. Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We have made modifications to MRIdian in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or PMA approvals were not required. We may make similar modifications or add additional features in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMA applications for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.

Furthermore, the FDA’s ongoing review of the 510(k) clearance process may make it more difficult for us to make modifications to our previously cleared products, either by imposing more strict requirements on when a new 510(k) notification for a modification to a previously cleared product must be submitted, or applying more onerous review criteria to such submissions. For example, the FDA is currently reviewing its guidance describing when it believes a manufacturer is obligated to submit a new 510(k) for modifications or changes to a previously cleared device. The FDA is expected to issue revised guidance to assist device manufacturers in making this determination. It is unclear whether the FDA’s approach in this new guidance will result in substantive changes to existing policy and practice regarding the assessment of whether a new 510(k) is required for changes or modifications to existing devices. The FDA continues to review its 510(k) clearance process, which could result in additional changes to regulatory requirements or guidance documents, which could increase the costs of compliance or restrict our ability to maintain current clearances.

If treatment guidelines for cancer radiation therapies change or the standard of care evolves, we may need to redesign and seek new marketing authorization from the FDA for MRIdian.

If treatment guidelines for cancer radiation therapies or the standard of care evolves, we may need to redesign MRIdian and seek new clearances or approvals from the FDA for MRIdian. Our 510(k) clearance from the FDA is based on current treatment guidelines. If treatment guidelines change so that different treatments become desirable, the clinical utility of MRIdian could be diminished and our business could suffer. For example, competition by other forms of cancer treatment, in particular personalized medicine approaches in targeting drugs and biologics, could reduce the use of radiation therapy as a standard of care in certain indications.

The misuse or off-label use of MRIdian may harm our reputation in the marketplace, result in injuries that lead to product liability suits or result in costly investigations, fines or sanctions by regulatory bodies if we are deemed to have engaged in the promotion of these uses, any of which could be costly to our business.

Clinicians or physicians may misuse MRIdian or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If MRIdian is misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Product liability claims could divert management’s attention from our core business,

 

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be expensive to defend and result in sizeable damage awards against us that may not be covered by insurance. In addition, any of the events described above could harm our business.

In addition, MRIdian has been cleared by the FDA for specific treatments. We train our marketing and direct sales force to not promote MRIdian for uses outside of the FDA-cleared indications for use, known as “off-label uses.” For example, MRIdian has not been indicated for diagnostic use. We cannot, however, prevent a physician from using MRIdian off-label, when in the physician’s independent professional medical judgment he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use MRIdian off-label. Furthermore, the use of MRIdian for indications other than those cleared by the FDA or approved by any foreign regulatory body may not effectively treat such conditions, which could harm our reputation in the marketplace among physicians and patients.

If the FDA or any foreign regulatory body determines that our promotional materials or training constitute promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action under other regulatory authority, such as false claims laws, if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations.

Our MRIdian systems may cause or contribute to adverse medical events that we are required to report to the FDA, and if we fail to do so, we would be subject to sanctions that could harm our reputation, business, financial condition and results of operations. The discovery of serious safety issues with our MRIdian systems, or a recall of our MRIdian systems either voluntarily or at the direction of the FDA or another governmental authority, could have a negative impact on us.

We are subject to the FDA’s medical device reporting regulations and similar foreign regulations, which require us to report to the FDA when we receive or become aware of information that reasonably suggests that MRIdian may have caused or contributed to a death or serious injury or malfunctioned in a way that, if the malfunction were to recur, it could cause or contribute to a death or serious injury. The timing of our obligation to report is triggered by the date we become aware of the adverse event as well as the nature of the event. We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an adverse event that is unexpected or removed in time from the use of MRIdian. If we fail to comply with our reporting obligations, the FDA could take action, including warning letters, untitled letters, administrative actions, criminal prosecution, imposition of civil monetary penalties, revocation of our device clearance, seizure of MRIdian or delay in clearance of future products.

The FDA and foreign regulatory bodies have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture of a product or in the event that a product poses an unacceptable risk to health. The FDA’s authority to require a recall must be based on a finding that there is reasonable probability that the device could cause serious injury or death. We may also choose to voluntarily recall a product if any material deficiency is found. A government-mandated or voluntary recall by us could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing defects, labeling or design deficiencies, packaging defects or other deficiencies or failures to comply with applicable regulations. For example, in January 2014, we initiated a correction of the system at Washington University in St. Louis due to a defect we identified in an advanced software feature in the treatment planning system of MRIdian. We promptly updated our

 

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software to resolve this defect and notified the FDA of this correction, but the FDA has not formally classified this correction as a recall. We cannot assure you that similar product defects or other errors will not occur in the future. Recalls involving MRIdian could be particularly harmful to our business, financial condition and results of operations because it is currently our only product.

Companies are required to maintain certain records of recalls and corrections, even if they are not reportable to the FDA. We may initiate voluntary withdrawals or corrections for MRIdian in the future that we determine do not require notification of the FDA. If the FDA disagrees with our determinations, it could require us to report those actions as recalls and we may be subject to enforcement action. A future recall announcement could harm our reputation with customers, potentially lead to product liability claims against us and negatively affect our sales.

If we or our distributors do not obtain and maintain international regulatory registrations or approvals for MRIdian, we will not be able to market and sell MRIdian outside of the United States.

Sales of our devices outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In addition, the FDA regulates exports of medical devices from the United States. While the regulations of some countries may not impose barriers to marketing and selling MRIdian or only require notification, others require that we or our distributors obtain the approval of a specified regulatory body. We have applied for and received regulatory approval in Europe, the United Arab Emirates and Italy, where regulatory approval is required in addition to the CE mark, and are seeking regulatory approval to market MRIdian in China, Japan, Taiwan, Russia, Hong Kong, Turkey and Korea. We currently have orders to deliver MRIdian to customers in the United States, Taiwan, Korea, Italy and the United Arab Emirates, which we include in our backlog due to the status of each sales order and our regulatory approval processes in these countries. Complying with foreign regulatory requirements, including obtaining registrations or approvals, can be expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals in each country in which we plan to market MRIdian or that we will be able to do so on a timely basis. The time required to obtain registrations or approvals, if required by other countries, may be longer than that required for FDA clearance, and requirements for such registrations or approvals may significantly differ from FDA requirements. If we modify MRIdian, we or our distributors may need to apply for additional regulatory approvals before we are permitted to sell the modified product. In addition, we may not continue to meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. If we or our distributors are unable to maintain our authorizations in a particular country, we will no longer be able to sell MRIdian in that country, which could harm our business.

Regulatory approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more foreign regulatory authorities does not ensure approval by regulatory authorities in other foreign countries or by the FDA. However, a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others.

We must manufacture MRIdian in accordance with federal and state regulations, and we could be forced to recall our installed systems or terminate production if we fail to comply with these regulations.

The methods used in, and the facilities used for, the manufacture of MRIdian must comply with the FDA’s Quality System Regulation, or QSR, which is a complex regulatory scheme that covers the procedures and documentation of the design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing and shipping of MRIdian. Furthermore, we are required to verify that our suppliers maintain facilities, procedures and operations that comply with our quality and applicable regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities,

 

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which may include the facilities of subcontractors. MRIdian is also subject to similar state regulations and various laws and regulations of foreign countries governing manufacturing.

We cannot guarantee that we or any subcontractors will take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of MRIdian. In addition, failure to comply with applicable FDA requirements or later discovery of previously unknown problems with MRIdian or manufacturing processes could result in, among other things:

 

  n   warning letters or untitled letters;

 

  n   fines, injunctions or civil penalties;

 

  n   suspension or withdrawal of approvals or clearances;

 

  n   seizures or recalls of MRIdian;

 

  n   total or partial suspension of production or distribution;

 

  n   administrative or judicially imposed sanctions;

 

  n   FDA’s refusal to grant pending or future clearances or approvals for MRIdian;

 

  n   clinical holds;

 

  n   refusal to permit the import or export of MRIdian; and

 

  n   criminal prosecution of us or our employees.

Any of these actions could significantly and negatively impact supply of MRIdian. If any of these events occurs, our reputation could be harmed, we could be exposed to product liability claims and we could lose customers and suffer reduced revenue and increased costs.

Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain regulatory clearances or approvals for MRIdian or to produce, market or distribute MRIdian after clearance or approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulation of medical devices or the reimbursement thereof. In addition, the FDA or Nuclear Regulatory Commission, or NRC, regulations and guidance are often revised or reinterpreted by the FDA or NRC in ways that may significantly affect our business and our MRIdian systems. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) clearance process, the FDA initiated an evaluation, and in January 2011, announced several proposed actions intended to reform the clearance process. In addition, as part of FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance or approval. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to manufacture, market or distribute MRIdian or future products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

 

  n   additional testing prior to obtaining clearance or approval;

 

  n   changes to manufacturing methods;

 

  n   recall, replacement or discontinuance of MRIdian or future products; or

 

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  n   additional record keeping.

Any of these changes could require substantial time and cost and could harm our business and our financial results.

In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the EU Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation (the Medical Devices Regulation). Unlike the Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices.

In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the Medical Devices Coordination Group, or MDCG (a new, yet to be created, body chaired by the European Commission, and representatives of EEA Member States), for an opinion. These new procedures may result in a longer or more burdensome assessment of our new products.

If adopted, the Medical Devices Regulation is expected to enter into force in 2015 and become applicable three years thereafter. In its current form it would, among other things, also impose additional reporting requirements on manufacturers of high-risk medical devices, impose an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance and provide for more strict clinical evidence requirements.

Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials, including Cobalt-60, lead and depleted uranium. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.

If we are found to have violated laws protecting the confidentiality of patient health information, we could be subject to civil or criminal penalties, which could increase our liabilities and harm our reputation or our business.

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.

 

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In particular, the U.S. Department of Health and Human Services has promulgated rules governing the privacy and security of individually identifiable health information under the Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, or HIPAA. These privacy and security rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their own health information, limiting most uses and disclosures of health information to the minimum amount reasonably necessary to accomplish the intended purpose, and requiring administrative, technical and physical safeguards. Although we are not a covered entity under HIPAA, we have entered into agreements with certain covered entity customers, such as health care providers, under which we are considered to be a “business associate” under HIPAA. As a business associate, we are contractually bound and may also be directly responsible under HIPAA, as amended by HITECH, to implement policies, procedures and reasonable and appropriate security measures to protect any individually identifiable health information we may create, receive, maintain or transmit on behalf of covered entities. We may also be subject to state laws protecting the confidentiality of medical records where those state laws have stricter provisions than HIPAA. Our failure to protect or secure any individually identifiable health information received on behalf of customers could subject us to civil and criminal liability, including the imposition of monetary fines, and adverse publicity, and could harm our business and impair our ability to attract new customers.

We are subject to federal and state fraud and abuse laws and health information privacy and security laws, which, if violated, could subject us to substantial penalties. Additionally, any challenge to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.

There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback, false claims and physician transparency laws. Our relationships with providers and hospitals are subject to scrutiny under these laws. We may also be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

 

  n   the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce either the referral of an individual or furnishing or arranging for a good or service, for which payment may be made, in whole or in part, under federal healthcare programs, such as Medicare and Medicaid;

 

  n   federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other third-party payors that are false or fraudulent;

 

  n   HIPAA, which created federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;

 

  n   the federal physician sunshine requirements under the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, which is defined broadly to include other healthcare providers and teaching hospitals and ownership and investment interests held by physicians and their immediate family members;

 

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  n   state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payor, including commercial insurers;

 

  n   state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and

 

  n   state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures.

These laws, among other things, constrain our business, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs, we may have with hospitals, physicians or other potential purchasers of medical devices. We have a variety of arrangements with our customers that could implicate these laws. Due to the breadth of these laws, the narrowness of statutory exceptions and safe harbors available, and the range of interpretations to which they are subject to, it is possible that some of our current or future practices might be challenged under one or more of these laws. Even an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to, and thus could harm our business, financial condition and results of operations.

In addition, recent healthcare reform legislation has strengthened these laws. For example, the Affordable Care Act, among other things, amends the intent requirement of the federal Anti-Kickback Statute and certain criminal healthcare fraud statutes. A person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them to have committed a violation. Moreover, the Affordable Care Act provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including administrative, civil and criminal penalties, damages, fines, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, imprisonment and the curtailment or restructuring of our operations, any of which could negatively impact our ability to operate our business and our results of operations.

Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, could harm our cash flows, financial condition and results of operations.

In March 2010, the Affordable Care Act was enacted in the United States, which made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. Among other things, the Affordable Care Act:

 

  n   requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices;

 

  n   establishes a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;

 

  n   implements payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and

 

  n   establishes an Independent Payment Advisory Board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

 

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In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for MRIdian or additional pricing pressure.

Risks Related to This Offering and Ownership of Our Common Stock

The price of our common stock may be volatile, and you may not be able to resell your shares at or above the initial public offering price.

The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiation between the underwriters and us. This price may not reflect the market price of our common stock following this offering. You may be unable to sell your shares of common stock at or above the initial public offering price due to fluctuations in the market price of our common stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

 

  n   actual or anticipated fluctuations in our financial condition and operating results;

 

  n   actual or anticipated changes in our growth rate relative to our competitors;

 

  n   commercial success and market acceptance of MRIdian;

 

  n   success of our competitors in discovering, developing or commercializing products;

 

  n   ability to commercialize or obtain regulatory approval for MRIdian, or delays in commercializing or obtaining regulatory approval;

 

  n   strategic transactions undertaken by us;

 

  n   additions or departures of key personnel;

 

  n   product liability claims;

 

  n   prevailing economic conditions;

 

  n   disputes concerning our intellectual property or other proprietary rights;

 

  n   FDA or other U.S. or foreign regulatory actions affecting us or the healthcare industry;

 

  n   healthcare reform measures in the United States;

 

  n   sales of our common stock by our officers, directors or significant stockholders;

 

  n   future sales or issuances of equity or debt securities by us;

 

  n   business disruptions caused by earthquakes, tornadoes or other natural disasters; and

 

  n   issuance of new or changed securities analysts’ reports or recommendations regarding us.

 

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In addition, the stock markets in general, and the markets for medical device companies in particular, have experienced extreme volatility that have been often unrelated to the operating performance of the issuer. These broad market fluctuations may negatively impact the price or liquidity of our common stock. In the past, when the price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 102 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An “emerging growth company” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Future sales of our common stock or securities convertible or exchangeable for our common stock may cause our stock price to decline.

If our existing stockholders or optionholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the price of our common stock could decline. The perception in the market that these sales may occur could also cause the price of our common stock to decline. Based on shares of common stock outstanding at September 30, 2014, upon the consummation of this offering, we will have outstanding a total of             shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares of common stock. Of these shares, only the shares of common stock sold by us in this offering, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares of common stock, will be freely tradable without restriction, unless held by our affiliates, in the public market immediately following this offering.

After the lock-up agreements expire,             shares of common stock will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act, with respect to shares held by directors, executive officers and other affiliates. The underwriters may, however, in their sole discretion, permit our directors, our executive officers and other stockholders and the holders of our outstanding options who are subject to the lock-up agreements to sell shares prior to the expiration of the lock-up agreements. Sales of these shares, or perceptions that they will be sold, could cause the price of our common stock to decline.

 

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In addition, based on the number of shares subject to outstanding awards under our 2008 Stock Option and Incentive Plan, or 2008 Plan, or available for issuance thereunder, at September 30, 2014, and including the initial reserves under our 2015 Equity Incentive Award Plan, or 2015 Plan,             shares of common stock that are either subject to outstanding options, outstanding but subject to vesting or reserved for future issuance under the 2008 Plan or 2015 Plan will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act. We also plan to file a registration statement permitting shares of common stock issued in the future pursuant to the 2008 Plan and 2015 Plan to be freely resold by plan participants in the public market, subject to the lock-up agreements, applicable vesting schedules and, for shares held by directors, executive officers and other affiliates, volume limitations under Rule 144 under the Securities Act. The 2015 Plan contains provisions for the annual increase of the number of shares reserved for issuance under such plan, as described elsewhere in this prospectus, which shares we also intend to register. If the shares we may issue from time to time under the 2008 Plan or 2015 Plan are sold, or if it is perceived that they will be sold, by the award recipients in the public market, the price of our common stock could decline.

Certain holders of approximately 61.4 million shares of common stock, including shares issuable upon exercise of our convertible preferred stock warrant, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. See the section titled “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates. Sales of such shares could also cause the price of our common stock to decline.

If there is no viable public market for our common stock, you may not be able to sell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock, and we cannot assure you that a regular trading market will develop and continue after this offering or that the price of our common stock will not decline below the initial public offering price. The initial public offering price will be determined through negotiations between us and the underwriters and may not be indicative of the price of our common stock following this offering. Among the factors to be considered in such negotiations will be prevailing market conditions, certain of our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. See the section titled “Underwriting” for additional information.

Investors in this offering will suffer immediate and substantial dilution of their investment.

If you purchase common stock in this offering, you will pay more for your shares than our pro forma as adjusted net tangible book value per share. Based upon an assumed initial public offering price of $        per share, the midpoint of the range on the cover page of this prospectus, you will incur immediate and substantial dilution of $         per share, representing the difference between our assumed initial public offering price and our pro forma as adjusted net tangible book value per share. Based upon the assumed initial public offering price of $         per share, purchasers of common stock in this offering will have contributed approximately     % of the aggregate purchase price paid by all purchasers of our stock but will own only approximately     % of our common stock outstanding after this offering. For information on how the foregoing amounts were calculated, see the section titled “Dilution.”

To the extent outstanding stock options or warrants are exercised, there will be further dilution to new investors.

We have issued options to acquire common stock and a warrant to acquire convertible preferred stock (which, upon consummation of this offering, will be exercisable for shares of common stock) at

 

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prices significantly below the assumed initial offering price. At September 30, 2014, there were 10,173,484 shares of common stock subject to outstanding options with a weighted-average exercise price of $0.30 per share. At September 30, 2014, there were 312,500 shares of convertible preferred stock subject to an outstanding warrant with an exercise price of $2.40 per share. To the extent that these outstanding options or the convertible preferred stock warrant are ultimately exercised, you will incur further dilution, and our stock price may decline.

Our operating results for a particular period may fluctuate significantly or may fall below the expectations of investors or securities analysts, each of which may cause our stock price to fluctuate or decline.

We expect our operating results to be subject to fluctuations. Our operating results will be affected by numerous factors, including:

 

  n   variations in the level of expenses related to MRIdian or future development programs;

 

  n   level of underlying demand for MRIdian and any other products we develop;

 

  n   addition or termination of clinical trials or funding support;

 

  n   receipt, modification or termination of government contracts or grants, and the timing of payments we receive under these arrangements;

 

  n   our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements;

 

  n   any intellectual property infringement lawsuit or opposition, interference or cancellation proceeding in which we may become involved; and

 

  n   regulatory developments affecting MRIdian or our competitors.

If our operating results for a particular period fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any fluctuations in our operating results may, in turn, cause the price of our common stock to fluctuate substantially. We believe that comparisons of our financial results from various reporting periods are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We will have broad discretion in the use of the net proceeds from this offering and may invest or spend the proceeds in ways which you do not agree or that may not yield a return.

We discuss our plan for the use of the net proceeds of this offering in the sections titled “Use of Proceeds” and “Business.” However, within the scope of our plan, and in light of the various risks to our business that are set forth in this section, our management will have broad discretion over the use of the net proceeds from this offering. Because of the number and variability of factors that will determine our use of such proceeds, you may not agree with how we allocate or spend the proceeds from this offering. We may pursue collaborations or clinical trials that do not result in an increase in the market value of our common shares and that may increase our losses. Our failure to allocate and spend the net proceeds from this offering effectively could harm our business, financial condition and results of operations. Until the net proceeds are used, they may be placed in investments that do not produce significant investment returns or that may lose value.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Based on the beneficial ownership of our common stock at September 30, 2014, after this offering, our officers and directors, together with holders of 5% or more of our outstanding common stock before this offering and their respective affiliates, will beneficially own approximately         % of our common

 

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stock, assuming no exercise of the underwriters’ option to purchase additional shares of common stock. Accordingly, these stockholders will continue to have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. The interests of these stockholders may not be the same as or may even conflict with your interests. For example, these stockholders could delay or prevent a change in control of the company, even if such a change in control would benefit our other stockholders, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the company or our assets and might affect the prevailing price of our common stock. The significant concentration of stock ownership may negatively impact the price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of the company, even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to change management.

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the consummation of this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

 

  n   a classified board of directors so that not all directors are elected at one time;

 

  n   a prohibition on stockholder action through written consent;

 

  n   no cumulative voting in the election of directors;

 

  n   the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director;

 

  n   a requirement that special meetings of stockholders be called only by the board of directors, the chairman of the board of directors, the chief executive officer or, in the absence of a chief executive officer, the president;

 

  n   an advance notice requirement for stockholder proposals and nominations;

 

  n   the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and

 

  n   a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our certificate of incorporation.

In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns, or within the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of the company. Furthermore, our amended and restated certificate of incorporation will specify that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. We believe this provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes,

 

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efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action.

Provisions in our charter documents and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future; therefore, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, our current loan and security agreement with Hercules contains, and our future loan arrangements may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on the company. If no securities or industry analysts commence coverage of the company, the price for our common stock could be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price could decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price could decline. If one or more of these analysts cease coverage of the company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

  n   market acceptance of MRI-guided radiation therapy;

 

  n   the benefits of MRI-guided radiation therapy;

 

  n   our ability to successfully sell and market MRIdian in our existing and expanded geographies;

 

  n   the performance of MRIdian in clinical settings;

 

  n   competition from existing technologies or products or new technologies and products that may emerge;

 

  n   the pricing and reimbursement of MRI-guided radiation therapy;

 

  n   the implementation of our business model and strategic plans for our business and MRIdian;

 

  n   the scope of protection we are able to establish and maintain for intellectual property rights covering MRIdian;

 

  n   our ability to obtain regulatory approval in targeted markets for MRIdian;

 

  n   estimates of our future revenue, expenses, capital requirements and our need for additional financing;

 

  n   our financial performance;

 

  n   our expectations related to the use of proceeds from this offering;

 

  n   developments relating to our competitors and the healthcare industry; and

 

  n   other risks and uncertainties, including those listed under the section titled “Risk Factors.”

These forward-looking statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus also contains estimates, projections and other information concerning our industry, our business and the market for MRI-guided radiation therapy, including data regarding the estimated size of this market, its projected growth rate and physician, hospital and patient data, as well as data regarding market research, estimates and forecasts prepared by our management. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph are derived from the same sources, unless otherwise expressly stated or the context otherwise requires.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of              shares of common stock in this offering will be approximately $         million at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds will be approximately $         million after deducting the underwriting discount and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discount.

We currently intend to use our existing cash and the net proceeds that we will receive from this offering as follows:

 

  n   approximately $         to $         million to support the ongoing commercialization of MRIdian, including, sales and marketing activities, manufacturing and supply chain management, installation, customer support and product quality; and

 

  n   approximately $         to $         million to fund research and development capital and expenses related to continued product development activities; and

 

  n   the remainder for general corporate purposes, including working capital.

We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

We believe opportunities may exist from time to time to expand our current business through acquisitions or in-licenses of complementary companies or technologies. While we have no current agreements, commitments or understandings for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

Our management will have broad discretion over the use of the net proceeds from this offering. The amounts and timing of our expenditures will depend upon numerous factors, including:

 

  n   personnel costs to support our product development and commercialization efforts;

 

  n   the outcomes of our research and development efforts;

 

  n   the timing of regulatory approvals for MRIdian in foreign countries; and

 

  n   our operations as a public company.

Pending the use of the proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities, certificates of deposit or government securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, under the terms of our loan and security agreement with Hercules Technology Growth Capital, Inc. and Hercules Technology III, L.P., or together, Hercules, we may not declare or pay any cash dividends or distributions without the consent of Hercules, subject to certain exceptions. Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant. Our future ability to pay cash dividends on our common stock may be limited by the terms of any future debt or preferred securities.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization at September 30, 2014 on:

 

  n   an actual basis;

 

  n   a pro forma basis to give effect to:

 

  n   the conversion of all outstanding shares of convertible preferred stock into 61,010,026 shares of common stock immediately prior to the consummation of this offering;

 

  n   the issuance and conversion of the principal and accrued interest of convertible notes into              shares of common stock immediately prior to the consummation of this offering, based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus;

 

  n   the reclassification of the convertible preferred stock warrant liability into additional paid-in capital; and

 

  n   the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the consummation of this offering; and

 

  n   a pro forma as adjusted basis to give further effect to the pro forma adjustments set forth above and the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us.

 

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The unaudited pro forma as adjusted information below is illustrative only, and cash and cash equivalents, total stockholders’ (deficit) equity and total capitalization following the consummation of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table together with our financial statements and related notes included elsewhere in this prospectus and the information set forth in the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    At September 30, 2014  
    Actual     Pro Forma     Pro Forma As
Adjusted(1)
 
    (in thousands, except share and per share
amounts)
 

Cash and cash equivalents

  $ 1,713      $ 1,713      $                
 

 

 

   

 

 

   

 

 

 

Convertible notes

  $ 3,904      $      $     

Long-term debt, current and noncurrent portion

    14,522        14,522     

Convertible preferred stock warrant liability

    84            

Convertible preferred stock, par value $0.01 per share: 67,460,997 shares authorized; 61,010,026 shares issued and outstanding actual; no shares issued and outstanding, pro forma and pro forma adjusted

    130,012            

Stockholders’ (deficit) equity:

     

Preferred stock, par value $0.01 per share; no shares authorized, issued or outstanding, actual;              shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     

Common stock, par value $0.01 per share; 81,000,000 shares authorized, 2,210,735 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma;              shares authorized,              shares issued and outstanding pro forma as adjusted

    22       

Additional paid-in capital

    1,345       

Accumulated deficit

    (142,426     (142,426  
 

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

    (141,059     (7,059  
 

 

 

   

 

 

   

 

 

 

Total capitalization

  $ 7,463      $ 7,463      $     
 

 

 

   

 

 

   

 

 

 

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit), and total capitalization by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the assumed initial public offering price remains the same and after deducting the underwriting discount. If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization would increase by approximately $         million, after deducting the underwriting discount, and we would have shares of common stock issued and outstanding, pro forma as adjusted.

 

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The outstanding share information in the table above is based on 63,220,761 shares of common stock outstanding at September 30, 2014 and excludes the following:

 

  n   10,173,484 shares of common stock issuable upon the exercise of outstanding stock options at September 30, 2014, with a weighted-average exercise price of $0.30 per share;

 

  n   312,500 shares of common stock issuable upon the exercise of an outstanding convertible preferred stock warrant at September 30, 2014, with an exercise price of $2.40 per share;

 

  n   899,351 shares of common stock reserved for issuance pursuant to future awards under the 2008 Stock Option and Incentive Plan at September 30, 2014, which will become available for issuance under the 2015 Equity Incentive Award Plan after consummation of this offering; and

 

  n                shares of common stock reserved for issuance pursuant to future awards under the 2015 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective immediately prior to the consummation of this offering.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Our pro forma net tangible book value at September 30, 2014 was $         million, or $         per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets less the amount of our total liabilities and divided by the total number of shares of common stock outstanding at September 30, 2014, after giving effect to (1) the conversion of all outstanding shares of convertible preferred stock into an aggregate of 61,010,026 shares of common stock immediately prior to the consummation of this offering; (2) the issuance and conversion of the principal and accrued interest of convertible notes into              shares of common stock immediately prior to the consummation of this offering, based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus; (3) the reclassification of the convertible preferred stock warrant liability into additional paid-in capital; and (4) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering.

After giving effect to the sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at September 30, 2014 would have been $         million, or $         per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $                

Pro forma net tangible book value per share at September 30, 2014

  $                   

Increase in pro forma net tangible book value per share attributable to investors in this offering

    
 

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

  $         $     
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $        , and the dilution to new investors by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. Similarly, an increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the pro forma as adjusted net tangible book value by $         per share and the dilution to new investors by $         per share, assuming the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount.

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $         per share, and the dilution in pro forma as adjusted net tangible book value per share to investors in this offering would be $         per share.

To the extent that outstanding options or the warrant with exercise prices per share that are less than the pro forma as adjusted net tangible book value per share, before giving effect to the issuance

 

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and sale of shares in this offering, are exercised, new investors will experience further dilution. If all of the outstanding options and the warrant described above were exercised, our pro forma net tangible book value at September 30, 2014, before giving effect to the issuance and sale of shares in this offering, would have been approximately $         million, or approximately $         per share, and our pro forma as adjusted net tangible book value at September 30, 2014 after this offering would have been approximately $         million, or approximately $         per share, causing dilution to new investors of approximately $         per share.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following table summarizes, at September 30, 2014, the differences between the number of shares of common stock purchased from us, after giving effect to the conversion of the convertible preferred stock into common stock, the total cash consideration paid and the average price per share paid by existing stockholders and by our new investors purchasing shares in this offering at the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us:

 

    Shares Purchased     Total Consideration     Average Price
Per Share
 
    Number   Percent     Amount      Percent    
    (in thousands)        

Existing stockholders

             $                  $                

New investors

          
 

 

 

 

 

   

 

 

    

 

 

   

Total

      100.0   $                      100.0  
 

 

 

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of common stock outstanding after this offering.

The above table and discussions are based on              shares of common stock outstanding at September 30, 2014 and excludes:

 

  n   10,173,484 shares of common stock issuable upon the exercise of outstanding stock options at September 30, 2014, with a weighted-average exercise price of $0.30 per share;

 

  n   312,500 shares of common stock issuable upon the exercise of an outstanding convertible preferred stock warrant at September 30, 2014, with an exercise price of $2.40 per share;

 

  n   899,351 shares of common stock reserved for issuance pursuant to future awards under the 2008 Stock Option and Incentive Plan at September 30, 2014, which will become available for issuance under the 2015 Equity Incentive Award Plan after consummation of this offering; and

 

  n                shares of common stock reserved for issuance pursuant to future awards under the 2015 Equity Incentive Award Plan, as well as any automatic increases in the number of shares of common stock reserved for future issuance under this plan, which will become effective immediately prior to the consummation of this offering.

 

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SELECTED FINANCIAL DATA

You should read the following selected financial data together with our financial statements and the related notes included elsewhere in this prospectus and the information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected financial data included in this section are not intended to replace the financial statements and the related notes included elsewhere in this prospectus.

We derived the selected statement of operations data for the years ended December 31, 2012 and 2013 and the balance sheet data at December 31, 2012 and 2013 from our audited financial statements appearing elsewhere in this prospectus. The selected statements of operations data for the nine months ended September 30, 2013 and 2014 and the balance sheet data at September 30, 2014 have been derived from our unaudited interim financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future and results for the nine months ended September 30, 2014 are not necessarily indicative of results to be expected for the full year.

 

    Year Ended
December 31,
    Nine Months Ended
September 30,
 
    2012     2013     2013     2014  
          (unaudited)  
    (in thousands except share and per share
amounts)
 

Statement of Operations Data:

   

Revenue:

   

Product

  $      $ 2,253      $      $ 5,702   

Service

           12               229   

Grant

    1,854        894        894          
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,854        3,159        894        5,931   

Cost of revenue:

       

Product

    3,714        8,173        3,638        7,858   

Service

           14               413   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    3,714        8,187        3,638        8,271   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    (1,860     (5,028     (2,744     (2,340

Operating expenses:

       

Research and development(1)

    8,159        8,780        6,450        7,451   

Selling and marketing(1)

    3,096        3,781        2,697        3,572   

General and administrative(1)

    6,422        9,508        7,114        9,395   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,677        22,069        16,261        20,418   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (19,537     (27,097     (19,005     (22,758

Interest income

    11        4        4        1   

Interest expense

    (181     (97     (11     (1,505

Other income (expense), net

           (32     (10     82   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (19,707     (27,222     (19,022     (24,180

Provision for income taxes

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (19,707   $ (27,222   $ (19,022   $ (24,180
 

 

 

   

 

 

   

 

 

   

 

 

 

Cumulative dividends on convertible preferred stock

  $ (5,424   $ (2,898   $ (2,898   $   

Deemed capital contribution on conversion of Series C convertible preferred stock into common stock

           8,783        8,783          

Deemed dividend on convertible preferred stock extinguishment

           (6,863     (6,863       

Deemed capital contribution on repurchase of Series A convertible preferred stock

                         9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (25,131   $ (28,200   $ (20,000   $ (24,171
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted(2)

  $ (14.62   $ (14.19   $ (10.34   $ (11.18
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares used in computing net loss per share attributable to common stockholders, basic and diluted(2)

    1,718,692        1,986,966        1,934,824        2,162,359   
 

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

    $ (0.53     $     
   

 

 

     

 

 

 

Weighted-average common shares used in computing pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

      52,923,624       
   

 

 

     

 

 

 

 

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(1) Includes stock-based compensation expense as follows:

 

    Year Ended
December 31,
     Nine Months Ended
September 30,
 
    2012      2013          2013              2014      
                  (unaudited)  
    (in thousands)  

Research and development

  $ 40       $ 29       $ 22       $ 70   

Selling and marketing

    7         9         7         11   

General and administrative

    72         181         151         181   
 

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

  $ 119       $ 219       $ 180       $ 262   
 

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 14 to our audited financial statements for an explanation of the method used to calculate our actual and pro forma basic and diluted net loss per share attributable to common stockholders.

 

    At December 31,     At
September 30,
2014
 
    2012     2013    
                (unaudited)  
    (in thousands)  

Balance Sheet Data:

 

Cash and cash equivalents

  $ 4,098      $ 26,529      $ 1,713   

Total assets

    12,998        37,665        19,879   

Deferred revenue, current and noncurrent portion

    217        553        1,008   

Convertible notes

                  3,904   

Total liabilities

    22,732        24,778        26,938   

Long-term debt, current and noncurrent portion

           14,384        14,522   

Convertible preferred stock warrant liability

           158        84   

Convertible preferred stock

    79,540        130,037        130,012   

Total stockholders’ deficit

    (89,274     (117,150     (141,059

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of financial condition and results of operations together with the section titled “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors.”

Company Overview

We design, manufacture and market MRIdian, the first and only MRI-guided radiation therapy system to image and treat cancer patients simultaneously. MRI is a broadly used imaging tool that has the ability to differentiate between types of soft tissue clearly, unlike X-ray or computed tomography, or CT, which are the most commonly used imaging technologies in radiation therapy today. MRIdian integrates MRI technology, radiation delivery and our proprietary software to locate, target and track the location and shape of soft-tissue tumors while radiation is delivered. These capabilities allow MRIdian to accurately deliver radiation to the tumor while reducing the amount delivered to healthy tissue, as compared to other radiation therapy treatments today. We believe this leads to improved patient outcomes and reduced side effects from off-target radiation delivery.

We received initial 510(k) marketing clearance from the FDA for our treatment planning and delivery software in January 2011 and for MRIdian in May 2012. We also received permission to affix the CE mark in November 2014, allowing MRIdian to be sold within the European Economic Area. At October 31, 2014, over 80 patients had received radiation treatment on MRIdian systems at three cancer centers located at Washington University in St. Louis, University of California, Los Angeles and the University of Wisconsin—Madison.

We currently market MRIdian through a direct sales force in the United States and distributors in the rest of the world. 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. Our sales and revenue cycle varies based on the customer and can be lengthy, sometimes lasting up to 18 to 24 months or more from initial customer contact to sales contract execution. Following execution of a sales contract, it generally takes nine to 12 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 two to three months to complete the installation and on-site testing of the system, including the completion of acceptance test procedures.

We generated product and service revenue of $2.3 million in 2013 and $5.9 million in the nine months ended September 30, 2014 and had net losses of $27.2 million in 2013 and $24.2 million in the nine months ended September 30, 2014. At September 30, 2014, we had six signed orders representing backlog value of $32.4 million, of which we expect to recognize approximately 30% to 60% as revenue in 2015.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

 

  n   add personnel to support our product development and commercialization efforts;

 

  n   continue our research and development efforts;

 

  n   seek regulatory approval for MRIdian in foreign countries; and

 

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  n   operate as a public company.

Accordingly, we may seek to fund our operations through public or private equity or 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 MRI-guided radiation therapy systems.

Backlog

We define backlog as the accumulation of all orders for which revenue has not been recognized and we consider valid. Backlog includes customer deposits received which are recorded as a liability 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. Typically, an order is included in backlog once a written agreement for the delivery of a MRIdian is executed, and we have received a material deposit. 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. Our criteria include an outstanding and effective written agreement for the delivery of a MRIdian, any changes in customer or distributor plans, the customer’s or distributor’s continued ability to fulfill the order contract and the status of regulatory approval.

In 2013, we executed new sales contracts with a total value of $17.4 million, and in the nine months ended September 30, 2014, we executed new sales contracts with a total value of $15.3 million. At September 30, 2014, we had six signed sales contracts for MRIdian systems in backlog with a total value of $32.4 million, of which we expect to recognize approximately 30% to 60% as revenue in 2015.

Components of Statements of Operations

Revenue

Product Revenue. Product revenue consists of sales of MRIdian systems, as well as optional components, such as additional planning workstations and body coils.

Following execution of a sales contract, it generally takes nine to 12 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 two to three months to complete the installation and on-site testing of the system, including the completion of acceptance test procedures. On-site training takes approximately one week and can be conducted concurrent with installation and acceptance testing. Sales 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.

Service Revenue. We generally offer maintenance service at no cost to customers to cover parts, labor and maintenance for one to two years. 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 24/7 on-site parts, 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 on a straight-line basis over the term during which the contracted services are provided.

 

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Grant Revenue. We were awarded grants by the State of Ohio for up to $2.8 million to support the initial development of MRIdian in Ohio. We received payments for cost reimbursement of allowable expenditures and payments for the achievement of certain milestones under these grants in return for over a contractually defined period. These payments are nonrefundable. These grants generally provided us with fixed payments over a contractually defined period of research. Grant revenues were recognized as certain milestones were achieved and as the associated expenses were incurred and billed to grantors. The grants expired in April 2013.

Cost of Revenue

Product Cost of Revenue. Product cost of revenue primarily consists of the cost of materials, installation and services associated with the manufacture and installation of MRIdian systems, as well as medical device excise tax and royalty payments to the University of Florida Research Foundation. Product cost of revenue also includes lower of cost or market inventory, or LCM, adjustments if the carrying value of the inventory is greater than its net realizable value. For strategic reasons, we sold our initial MRIdian systems prior to the receipt of FDA marketing clearance at prices lower than our projected costs to manufacture and install. As we accumulated materials, installation and other costs for these systems, we regularly assessed the carrying value of the related inventory value and recorded charges, or LCM adjustments, to reduce inventory to the lower of cost and net realizable value. The remaining realizable value of inventory was charged to product cost of revenue as those initial sites were completed and accepted. This resulted in LCM charges of $3.7 million in 2012 and $4.6 million in 2013 and $0.6 million for the nine months ended September 30, 2014. During 2012 and 2013, LCM charges increased as we progressed with the initial installations of three MRIdian systems, and we expect our LCM charges to decrease as we raise our selling prices and reduce our manufacturing costs.

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 maintenance of 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. Other significant research and development costs arise from development, manufacturing and commercialization of MRIdian. These costs consist of 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 expenses as incurred. As we continue to invest in improving MRIdian and developing new technologies, we expect research and development expenses to increase in absolute dollars.

Selling and Marketing. Selling and marketing expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel associated with our selling and marketing organization, including our direct sales force and sales management and our marketing and customer support personnel. Selling and marketing expenses also include costs related to trade shows and marketing programs. We expense selling and marketing costs as incurred. We expect selling and marketing expenses to increase in future periods as we expand our sales force and our marketing and customer support organization and increase our participation in trade shows and marketing programs.

General and Administrative. Our general and administrative expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits

 

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and travel, for our finance, human resources, regulatory and other administrative personnel. 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. We expect general and administrative expenses to increase in absolute dollars following the consummation of this offering due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with growing our business.

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 of the debt discount related to our convertible notes issued in 2011 and long-term debt with Hercules Technology III, L.P. and Hercules Technology Growth Capital, Inc., or together, Hercules.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency exchange gains and losses and changes in the fair value of a convertible preferred stock warrant.

The outstanding convertible preferred stock warrant is 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 income (expense), net. We will continue to record adjustments to the fair value of the convertible preferred stock warrant until the earlier of the exercise, the expiration of the convertible preferred stock warrant or the conversion of the underlying convertible preferred stock into common stock, including upon consummation of this offering, at which time the liability will be reclassified to stockholders’ deficit.

Results of Operations

The following tables set forth our results of operations for the periods presented:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
          2012                 2013           2013     2014  
    (in thousands)  
                (unaudited)  

Revenue:

       

Product

  $      $ 2,253      $      $ 5,702   

Service

           12               229   

Grant

    1,854        894        894          
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,854        3,159        894        5,931   

Cost of revenue:

       

Product

    3,714        8,173        3,638        7,858   

Service

           14               413   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    3,714        8,187        3,638        8,271   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    (1,860     (5,028     (2,744     (2,340

Operating expenses:

       

Research and development

    8,159        8,780        6,450        7,451   

Selling and marketing

    3,096        3,781        2,697        3,572   

General and administrative

    6,422        9,508        7,114        9,395   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17,677        22,069        16,261        20,418   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (19,537     (27,097     (19,005     (22,758

Interest income

    11        4        4        1   

Interest expense

    (181     (97     (11     (1,505

Other income (expense), net

           (32     (10     82   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (19,707   $ (27,222   $ (19,022   $ (24,180
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of the Nine Months Ended September 30, 2013 and 2014

Revenue

 

    Nine Months Ended
September 30,
        
        2013              2014          Change  
    (in thousands)  
    (unaudited)         

Product revenue

  $       $ 5,702       $ 5,702   

Service revenue

            229         229   

Grant revenue

    894                 (894
 

 

 

    

 

 

    

 

 

 

Total revenue

  $ 894       $ 5,931       $ 5,037   
 

 

 

    

 

 

    

 

 

 

Revenue during the nine months ended September 30, 2014 increased $5.0 million compared to the same period in 2013, primarily due to an increase in product revenue of $5.7 million and an increase in service revenue of $0.2 million, partially offset by a $0.9 million decrease in grant revenue.

Product Revenue. Product revenue during the nine months ended September 30, 2014 increased $5.7 million compared to the same period in 2013. This increase was due to the acceptance of a MRIdian at each of University of California, Los Angeles and the University of Wisconsin—Madison during the nine months ended September 30, 2014.

Service Revenue. Service revenue during the nine months ended September 30, 2014 increased $0.2 million compared to the same period in 2013. This increase was due to maintenance service revenue recognized for the MRIdian installed at Washington University in St. Louis during the year ended December 31, 2013 and the MRIdian installed at each of University of California, Los Angeles and the University of Wisconsin—Madison during the nine months ended September 30, 2014.

Grant Revenue. Grant revenue during the nine months ended September 30, 2014 decreased $0.9 million compared to the same period in 2013, due to the expiration in April 2013 of the grant from the State of Ohio. The $0.9 million in grant revenue recognized during the nine months ended September 30, 2013 was for achieving certain milestones and for qualifying research and development expenditures which were reimbursed by the State of Ohio.

Cost of Revenue

 

    Nine Months Ended
September 30,
        
        2013              2014          Change  
    (in thousands)  
    (unaudited)         

Product cost of revenue

  $ 3,638       $ 7,858       $ 4,220   

Service cost of revenue

            413         413   
 

 

 

    

 

 

    

 

 

 

Total cost of revenue

  $ 3,638       $ 8,271       $ 4,633   
 

 

 

    

 

 

    

 

 

 

Product Cost of Revenue. Product cost of revenue during the nine months ended September 30, 2014 increased $4.2 million compared to the same period in 2013. Product cost of revenue during the nine months ended September 30, 2013 consisted of $3.6 million of LCM adjustments related to inventory. Product cost of revenue during the nine months ended September 30, 2014 consisted primarily of the release of inventory costs for accepted MRIdian systems and additional installation costs incurred in 2014 of $7.3 million and LCM adjustments of $0.6 million.

Service Cost of Revenue. Service cost of revenue during the nine months ended September 30, 2014 increased $0.4 million, compared to the same period in 2013. The increase in service cost of revenue was due to the provisioning of services for the MRIdian installed at each of Washington University in St. Louis, University of California, Los Angeles and the University of Wisconsin–Madison.

 

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Operating Expenses

 

    Nine Months Ended
September 30,
        
    2013      2014      Change  
    (in thousands)  
    (unaudited)         

Research and development

  $ 6,450       $ 7,451       $ 1,001   

Selling and marketing

    2,697         3,572         875   

General and administrative

    7,114         9,395         2,281   
 

 

 

    

 

 

    

 

 

 

Total operating expenses

  $ 16,261       $ 20,418       $ 4,157   
 

 

 

    

 

 

    

 

 

 

Research and Development. Research and development expenses during the nine months ended September 30, 2014 increased $1.0 million, or 16%, compared to the same period in 2013. This increase was primarily attributable to a $0.6 million increase in project material costs, an increase in personnel and related costs of $0.4 million as a result of higher employee headcount, and a $0.3 million increase in travel expenses, offset by a $0.2 million decrease in grant project contractor expense due to the expiration of the State of Ohio grant in April 2013.

Selling and Marketing. Selling and marketing expenses during the nine months ended September 30, 2014 increased $0.9 million, or 32%, compared to the same period in 2013. This increase was primarily attributable to a $0.4 million increase in trade show expenses, a $0.3 million increase in travel-related expenses to promote international sales and a $0.2 million increase in public relations and website redesign expenses.

General and Administrative. General and administrative expenses during the nine months ended September 30, 2014 increased $2.3 million, or 32%, compared to the same period in 2013. This increase was primarily attributable to a $0.9 million increase in travel expenses, a $0.5 million increase in regulatory consulting expenses, a $0.3 million increase in accounting expenses, a $0.3 million increase in personnel and related costs and a $0.2 million increase in rent expense due to our new office lease in Mountain View, California, which commenced during the third quarter of 2014.

Interest Expense

 

    Nine Months Ended
September 30,
       
        2013             2014         Change  
    (in thousands)  
    (unaudited)        

Interest expense

  $ (11   $ (1,505   $ 1,494   

During the nine months ended September 30, 2014, interest expense increased $1.5 million as a result of the long-term debt we incurred in December 2013.

Other Income (Expense), Net

 

    Nine Months Ended
September 30,
        
        2013             2014          Change  
    (in thousands)  
    (unaudited)         

Other income (expense), net

  $ (10   $ 82       $ 92   

Other income (expense), net during the nine months ended September 30, 2014 consisted primarily of the change in fair value of our convertible preferred stock warrant liability.

 

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Comparison of the Years Ended December 31, 2012 and 2013

Revenue

 

    Year Ended December 31,         
        2012              2013          Change  
    (in thousands)  

Product revenue

  $       $ 2,253       $ 2,253   

Service revenue

            12         12   

Grant revenue

    1,854         894         (960
 

 

 

    

 

 

    

 

 

 

Total revenue

  $ 1,854       $ 3,159       $ 1,305   
 

 

 

    

 

 

    

 

 

 

Total revenue in 2013 increased by $1.3 million compared to 2012, primarily due to an increase in product revenue of $2.3 million, partially offset by a decrease in grant revenue of $1.0 million.

Product Revenue. Product revenue in 2013 increased by $2.3 million compared to 2012, as a result of customer acceptance of a MRIdian at Washington University in St. Louis.

Service Revenue. Service revenue in 2013 increased by $12 thousand compared to 2012, as a result of the provisioning of maintenance services for the MRIdian at Washington University in St. Louis.

Grant Revenue. Grant revenue in 2012 and 2013 related solely to our grants from the State of Ohio. The grants expired in April 2013.

Cost of Revenue

 

    Year Ended December 31,         
        2012              2013          Change  
    (in thousands)  

Product cost of revenue

  $ 3,714       $ 8,173       $ 4,459   

Service cost of revenue

            14         14   
 

 

 

    

 

 

    

 

 

 

Total cost of revenue

  $ 3,714       $ 8,187       $ 4,473   
 

 

 

    

 

 

    

 

 

 

Product Cost of Revenue. Product cost of revenue in 2013 increased by $4.5 million compared to 2012. Product cost of revenue during 2012 consisted of LCM adjustments of $3.7 million related to inventory. Product cost of revenue during 2013 consisted of LCM adjustments of $4.6 million and $3.6 million in inventory costs related to customer acceptance of a MRIdian to Washington University in St. Louis.

Service Cost of Revenue. Service cost of revenue in 2013 increased by $14 thousand compared to 2012, as a result of the provisioning of services for the MRIdian at Washington University in St. Louis.

Operating Expenses

 

    Year Ended December 31,         
          2012                  2013            Change  
    (in thousands)  

Research and development

  $ 8,159       $ 8,780       $ 621   

Selling and marketing

    3,096         3,781         685   

General and administrative

    6,422         9,508         3,086   
 

 

 

    

 

 

    

 

 

 

Total operating expenses

  $ 17,677       $ 22,069       $ 4,392   
 

 

 

    

 

 

    

 

 

 

 

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Research and Development. Research and development expenses in 2013 increased by $0.6 million, or 8%, compared to 2012. This increase was primarily attributable to a $0.4 million increase in travel expenses and a $0.2 million increase in personnel and related expenses, as a result of higher employee headcount.

Selling and Marketing. Selling and marketing expenses in 2013 increased by $0.7 million, or 22%, compared to 2012. This increase was primarily attributable to a $0.3 million increase in personnel and related expenses, a $0.3 million increase in travel expenses and a $0.1 million increase in trade show expenses.

General and Administrative. General and administrative expenses in 2013 increased by $3.1 million, or 48%, compared to 2012. This increase was primarily attributable higher personnel and related costs of $2.1 million attributable to higher employee headcount. The change was also attributable to a $0.5 million increase in consulting expenses due to higher regulatory activities, a $0.4 million increase in accounting and legal fees and a $0.2 million loss on disposal of long-lived assets, partially offset by a $0.1 million decrease in travel expenses.

Interest Expense

 

    Year Ended December 31,        
        2012             2013         Change  
    (in thousands)  

Interest expense

  $ (181   $ (97   $ (84

Interest expense in 2012 consisted of interest on convertible promissory notes that were converted into Series C convertible preferred stock in March 2012. Interest expense in 2013 consisted of one month of interest expense in connection with our $15.0 million term loan that we entered into with Hercules in December 2013.

Other Income (Expense), Net

 

    Year Ended December 31,        
        2012              2013         Change  
    (in thousands)  

Other income (expense), net

  $     –       $ (32   $ (32

Other income (expense), net in 2013 consisted solely of foreign currency exchange gains and losses.

Liquidity and Capital Resources

Since our inception in 2004 as a Florida corporation, we have incurred significant net losses and negative cash flows from operations. In 2012, 2013 and the nine months ended September 30, 2014, we had net losses of $19.7 million, $27.2 million and $24.2 million, respectively. At September 30, 2014, we had an accumulated deficit of $142.4 million.

At September 30, 2014, we had cash and cash equivalents of $1.7 million. To date, we have financed our operations principally through private placements of our convertible preferred stock, issuances of convertible notes and receipts of customer deposits for new orders and payments from customers for systems installed. Through September 30, 2014, we have received net proceeds of $114.4 million from the issuance of shares of our convertible preferred stock. We expect that our existing cash and cash equivalents, together with cash receipts from sales of MRIdian systems and the net proceeds from this offering, will enable us to conduct our planned operations through at least 2016.

 

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We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future financing 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 through non-dilutive means, 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.”

The following table summarizes our cash flows for the periods presented:

 

    Year Ended December 31,     Nine Months Ended
September 30,
 
            2012                     2013             2013     2014  
    (in thousands)  
                (unaudited)  

Cash used in operating activities

  $ (18,866   $ (25,371   $ (20,704   $ (27,207

Cash used in investing activities

    (534     (1,593     (1,216     (1,497

Cash provided by financing activities

    21,024        49,395        19,932        3,888   

Operating Activities

We have historically experienced negative cash outflows as we developed MRIdian and continued to expand our business. Our net cash used in operating activities primarily results from our net loss adjusted for non-cash expenses and changes in working capital components as we have grown our business, and is influenced by the timing of cash payments for inventory purchase and cash receipts from our customers. Our primary source of cash flow from operating activities is cash receipts from customers including sales of MRIdian systems and, to a lesser extent, by 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. Our cash flows from operating activities will continue to be affected principally by our working capital requirements and the extent to which we build up our inventory balances and increase spending on personnel and other operating activities as our business grows.

During the nine months ended September 30, 2014, operating activities used $27.2 million in cash, primarily as a result of our net loss of $24.2 million and a $4.7 million net change in our operating assets and liabilities, which was partially offset by aggregate non-cash charges of $1.7 million. The net change in our operating assets and liabilities was primarily the result of higher accounts receivables balances and increased purchases of inventory, offset by higher customer deposits and increases in accrued expenses and other long-term liabilities. The increase in accounts receivable of $2.0 million and customer deposits of $2.1 million was primarily due to revenue and new sales order growth in the nine months ended September 30, 2014. The increase in inventory of $3.0 million and deposits on purchased components of $1.4 million was primarily due to installations of MRIdian systems. The decrease of $0.6 million in accrued expenses and other long-term liabilities was mainly due to $1.5 million payment of our accrued purchase commitments, offset by a $0.9 million increase in accrued expenses and other long-term liabilities attributable to higher accrued personnel costs due to growth in headcount, higher accrued sales tax and medical device exercise tax liabilities, and increase in accrued interest as a result of debt incurred in December 2013. Non-cash charges primarily included $0.7 million for depreciation and amortization, $0.3 million in stock-based compensation and $0.6 million of LCM adjustments related to the reduction of the carrying value of inventory to its net realizable value.

During the nine months ended September 30, 2013, operating activities used $20.7 million in cash, primarily as a result of our net loss of $19.0 million and a $6.3 million net change in our operating assets and liabilities, which was partially offset by aggregate non-cash charges of $4.7 million. The net

 

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change in our operating assets and liabilities was primarily the result of increased purchases of inventory and decrease in accounts payable, offset by increases in accrued expenses and other long-term liabilities. The increase in inventory of $7.1 million was primarily due to the installation of MRIdian systems. The decrease in accounts payable of $1.4 million was due to timing differences in making payments compared to December 31, 2012. These changes were offset by a $2.2 million increase in accrued expenses and other long-term liabilities attributable to higher accrued personnel costs due to growth in headcount. Non-cash charges primarily included $0.8 million for depreciation and amortization and $3.6 million of LCM adjustments related to the reduction of the carrying value of inventory to its net realizable value.

During 2013, operating activities used $25.4 million in cash, primarily as a result of our net loss of $27.2 million and a $4.3 million net change in our operating assets and liabilities, which was partially offset by aggregate non-cash charges of $6.1 million. The net change in our operating assets and liabilities was primarily the result of increased purchases of inventory and lower accounts payable, offset by increase in accrued expenses and other long-term liabilities. The increase in inventory of $5.2 million and deposits on purchased components of $0.9 million was mainly due to the installation of MRIdian systems. The decrease in accounts payable of $0.7 million was due to timing differences in making payments when compared to December 31, 2012. These changes were offset by a $2.1 million increase in accrued expenses and other long-term liabilities attributable to higher accrued personnel costs due to growth in headcount. Non-cash charges primarily included $1.1 million for depreciation and amortization and $4.6 million of LCM adjustments related to the reduction of the carrying value of inventory to its net realizable value.

During 2012, operating activities used $18.9 million in cash, primarily as a result of our net loss of $19.7 million and a $4.6 million net change in our operating assets and liabilities, which was partially offset by aggregate non-charge charges of $5.4 million. The net change in our operating assets and liabilities was primarily the result of increased purchases of inventory offset by higher accounts payable. The increase in inventory of $5.8 million and deposits on purchased components of $1.0 million was primarily due to the installation of MRIdian systems. These changes were offset by a $1.8 million increase in accounts payable, reflecting timing of payments due to the growth in our business activities. Non-cash charges primarily included $1.6 million for depreciation and amortization and $3.7 million of LCM adjustments related to the reduction of the carrying value of inventory to its net realizable value.

Investing Activities

Cash used in investing activities during the nine months ended September 30, 2014 of $1.5 million primarily resulted from capital expenditures to purchase property and equipment of $1.4 million.

Cash used in investing activities during the nine months ended September 30, 2013 of $1.2 million primarily resulted from capital expenditures to purchase property and equipment of $0.8 million and to purchase an intellectual property license of $0.5 million.

Cash used in investing activities during 2013 of $1.6 million primarily resulted from capital expenditures to purchase property and equipment of $1.2 million and to purchase an intellectual property license of $0.5 million.

Cash used in investing activities during 2012 of $0.5 million resulted from capital expenditures to purchase property and equipment.

Financing Activities

During the nine months ended September 30, 2014, financing activities provided $3.9 million in cash from the net proceeds related to the issuance of convertible notes of $3.9 million.

 

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During the nine months ended September 30, 2013, financing activities provided $19.9 million in cash from the net proceeds related to the issuance of convertible preferred stock of $19.9 million.

During 2013, financing activities provided $49.4 million in cash from the net proceeds related to the issuance of convertible preferred stock of $34.9 million, net of issuance costs, and net proceeds of $14.5 million related to the term loan we entered into with Hercules in December 2013.

During 2012, financing activities provided $21.0 million in cash from the net proceeds related to the issuance of convertible preferred stock, net of issuance costs of $21.0 million.

Contractual Obligations

Our contractual commitments will have an impact on our future liquidity. The following table summarizes our contractual obligations at December 31, 2013, which represent contractually committed future obligations.

 

    Payment Due by Period  
    Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
    (in thousands)  

Operating leases(1)

  $ 254       $ 254       $       $       –       $       –   

Principal payments on long-term debt(2)

    15,000                 15,000                   

Interest payments on long-term debt

    4,277         1,505         2,772                   

Firm purchase commitments(3)

    1,502         1,502                           
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total minimum payments

  $ 21,033       $ 3,261       $ 17,772       $       $   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In 2014, we entered into a new operating lease for our office space in Mountain View, California, for a term of five years and two months, through November 2019. We also extended our lease for our office space in Oakwood Village, Ohio for an additional three-year term, through 2017. Payments associated with these two lease agreements increased by $5.4 million, of which $0.3 million is due in less than one year, $3.3 million is due in one to three years and $1.8 million is due in three to five years.
(2) Excludes a $240 thousand note payable to Cuyahoga County, Ohio in connection with the renovation of our Oakwood Village, Ohio headquarters.
(3) Our purchase commitments consist solely of vendor purchase orders.

Operating Lease Obligations

We are obligated under operating leases for office space and office equipment. Our Oakwood Village, Ohio lease runs through October 2017, with an option to extend the term through October 2027. Our Mountain View, California lease runs through November 2019. We are responsible for our share of increases in costs incurred by the landlords in the operation, maintenance, repair and management of these two properties.

Credit Facility

In December 2013, we entered into a Loan and Security Agreement, or the Term Loan, with Hercules for $15.0 million, which was outstanding at December 31, 2013 and September 30, 2014. Borrowings under the Term Loan bear cash interest at the greater of the annual prime rate plus 7.0% or 10.25%, which was 10.25% at December 31, 2013 and September 30, 2014. In addition, borrowings under the Term Loan bear deferred payment in-kind interest at 1.5% per annum. Interest only payments began in January 2014, with monthly principal and interest payments beginning on January 1, 2015 (subject to deferral to July 1, 2015 upon meeting certain conditions), with the entire balance of the Term Loan to be paid in full by the June 1, 2017 maturity date. The Term Loan is

 

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subject to a prepayment penalty of 5% on the outstanding balance during the first 12 months following the funding of the Term Loan and 1% on the outstanding balance thereafter. The loan is secured by essentially all of our assets and limits our ability with respect to additional indebtedness, investments or dividends, among other things, subject to customary exceptions.

Unsecured Convertible Promissory Notes

In August 2014, we entered into a Convertible Promissory Note Agreement, or the Convertible Note Agreement, with a majority of our current investors to sell unsecured convertible notes totaling $10.0 million with the option to raise an additional $1.5 million should additional investors choose to participate in the offering, or the 2014 Notes. We received aggregate gross proceeds of $3.9 million under the Convertible Note Agreement in August 2014. An additional $6.1 million was received at a subsequent closing in November 2014. The 2014 Notes bear simple interest at 8% per annum and are subordinated in right of payment to all of our current and future indebtedness. The 2014 Notes mature in November 2015, at which time all outstanding principal and interest are due unless previously converted. The Convertible Note Agreement provides for the conversion of the 2014 Notes at the option of the majority investors, and at any time, into shares of Series C convertible preferred stock at the then applicable conversion price, which at September 30, 2014 was equal to the original purchase price of $2.40 per share. The Convertible Note Agreement also provides for automatic conversion if the following events occur prior to the maturity of the 2014 Notes: (i) upon a qualifying equity financing (proceeds of at least $10.0 million) into shares of our equity securities issued in the financing and at the per share sale price; (ii) upon an IPO into shares of common stock and at the IPO price; (iii) or upon a change of control whereby we will repay the notes at the greater of (a) an amount equal to the outstanding principal with any unpaid accrued interest and (b) the liquidation preference of Series C convertible preferred stock as if the notes were converted to Series C convertible preferred stock at the original purchase price of $2.40 per share. The 2014 Notes also contain certain events of default whereby the principal and unpaid accrued interest will become due and payable. The 2014 Notes also cannot be prepaid without the consent of a majority of the note holders. In December 2014, all outstanding principal and interest under the 2014 Notes were converted into 4,238,915 shares of Series C convertible preferred stock at a price of $2.40 per share.

Purchase Commitments

At December 31, 2013, we had firm purchase commitments of $1.5 million from outstanding non-cancellable purchase orders related to the manufacture of MRIdian systems, which was accounted for as part of the inventory lower of cost and market adjustment. We had no firm purchase commitments at September 30, 2014.

In the ordinary course of business, we enter into contracts for the purchase of inventory with long lead times. Such contracts are generally cancellable. However, in the event of cancellation, we may forfeit any deposit.

Letters of Credit

In February 2010, in connection with our regulatory obligations to the State of Ohio Department of Health, we entered into a standby letter of credit with PNC Bank, National Association, or PNC, for $103 thousand to provide certification of financial assistance for decommissioning Cobalt-60 radioactive materials. In April 2011, in connection with contractual obligations with a customer, we entered into a standby letter of credit with PNC for $350 thousand. In February 2014, the letter of credit was cancelled. In July 2014, in connection with our Mountain View, California lease, we entered into a standby letter of credit with PNC for $450 thousand. At September 30, 2014, we had an aggregate of $553 thousand of outstanding letters of credit. In December 2014, as a performance guarantee in connection with the contractual obligations with a distributor, we entered into a standby letter of credit with PNC for $500 thousand.

 

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Off-Balance Sheet Arrangements

During 2012, 2013 and the nine months ended September 30, 2014, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.

Interest Rate Risk

Our cash and cash equivalents primarily consist of highly liquid checking and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial statements.

Borrowings under our long-term debt agreements have fixed interest rates and, in one instance, a partially variable interest rate. The 2014 Notes have an 8% fixed interest rate, so a hypothetical change in interest rates would not have an impact on our borrowings or results of operations. Our term loan has a variable interest rate of the greater of prime plus 7.0% or 10.25%. While the term loan has been outstanding, the actual interest rate has been 10.25%. Accordingly, a hypothetical 100-basis point decrease in interest rates would not have an impact on our borrowings or results of operations. However, a hypothetical 100-basis point increase in interest rates would have increased the related interest expense by approximately $0.1 million during the nine months ended September 30, 2014 and would have had an immaterial impact on our results of operations for 2013 due to the short period of time the loan was outstanding during 2013.

Foreign Currency Risk

The majority of our international sales contracts are denominated in U.S. dollars. However, we pay certain of our suppliers in a foreign currency under the terms of their supply agreements, and we may pay other suppliers in the future in foreign currency. We do not currently engage in any hedging transactions.

JOBS Act Accounting Election

We are an “emerging growth company” within the meaning of the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

 

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We believe that the assumptions and estimates have the greatest potential impact on our financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our financial statements.

Revenue Recognition

Revenue recognition for systems that we install generally occurs when the customer acknowledges that the system operates in accordance with our standard product specifications, the customer accepts the installed unit and we transfer title and risk of loss to the customer. Service revenue is recognized on a straight-line basis over the term during which contracted services are provided. We use judgment to estimate revenue allocations from sales arrangements with multiple deliverables between the product and service revenue. In situations where a deliverable in a multi-element arrangement has a value to the customer on a stand-alone basis, we are required to allocate the fair value of the various elements based on the selling price of each element. The principal deliverables consist of (i) sale of MRIdian systems, which generally includes installation, site preparation and software, and (ii) product support, which includes extended service and maintenance. We determine selling prices using vendor specific objective evidence, or VSOE, if it exists, or third-party evidence, or TPE. If neither VSOE or TPE exists for a deliverable, we use best estimated selling price, or BESP. We allocate revenue to multiple elements generally using the relative fair values as determined by BESP. We regularly review VSOE, TPE and BESP for all of our products and services.

We also receive payments for cost reimbursement of allowable expenditures and payments for the achievement of certain milestones under government grants in return for qualifying property and equity purchases and research and development activities over a contractually defined period. These payments are nonrefundable. Government grants generally provide us with fixed payments and a contractually defined period of research. Grant revenues are recognized as associated expenses incurred and are billed to grantors in conjunction with the terms of the grants.

Stock-Based Compensation

Stock-based compensation expense is measured and recognized in the financial statements based on the fair value of the awards granted. The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized, net of forfeitures, over the requisite service periods of the awards, which is generally four years.

Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

These assumptions and estimates are as follows:

Fair Value of Common Stock. As our stock is not publicly traded, we must estimate the fair value of common stock, as discussed in “Common Stock Valuations” below.

Expected Term. The expected term represents the period that our option awards are expected to be outstanding. We consider several factors in estimating the expected term of options granted, including the expected lives used by a peer group of companies within our industry that we consider to be comparable to our business and the historical option exercise behavior of our employees, which we believe is representative of future behavior.

 

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Expected Volatility. As we do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in our industry, which were the same as the comparable companies used in the common stock valuation analysis. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

Risk-Free Interest Rate. We base the risk-free interest rate on the yields of zero coupon U.S. Treasury securities with maturities similar to the term of employee stock option awards.

Expected Dividend Yield. We have never declared or paid any cash dividends on common stock and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

During 2012 and 2013, stock-based compensation expense was $119 thousand and $219 thousand, respectively. During the nine months ended September 30, 2013 and 2014, stock-based compensation expense was $180 thousand and $262 thousand, respectively. As of September 30, 2014, we had $644 thousand of total unrecognized stock-based compensation costs, net of estimated forfeitures, which we expect to recognize over a weighted-average period of three years.

Common Stock Valuations. The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or AICPA Practice Aid. The assumptions we use in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

 

  n   valuations performed by unrelated third-party specialists;

 

  n   the prices, rights, preferences, and privileges of our convertible preferred stock relative to those of our common stock;

 

  n   the prices of our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

  n   the lack of marketability of our common stock;

 

  n   our actual operating and financial performance;

 

  n   current business conditions and projections;

 

  n   our hiring of key personnel and the experience of our management;

 

  n   our history and the timing of the introduction of new products and services;

 

  n   our stage of development;

 

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  n   the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions;

 

  n   the illiquidity of stock-based awards involving securities in a private company;

 

  n   the market performance of comparable publicly traded companies; and

 

  n   the U.S. and global capital market conditions.

For the valuations of our common stock, our management estimated, as of each valuation date, our enterprise value on a continuing operations basis, using the income approach and various market approaches described in the AICPA Practice Aid.

For valuations after the consummation of this offering, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock on the date of grant, as reported on The NASDAQ Global Market.

Based on the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, the intrinsic value of stock options outstanding at September 30, 2014 was $         million, of which $         million and $         million related to stock options that were vested and unvested, respectively, at that date.

Convertible Preferred Stock Warrant

In December 2013 in connection with the Term Loan, we issued a warrant to Hercules to purchase 312,500 shares of Series C convertible preferred stock with an exercise price of $2.40 per share, subject to certain adjustments. This convertible preferred stock warrant is exercisable in whole or in part at any time prior to the expiration date of the warrant, which is the later of (i) December 16, 2023 and (ii) the date that is five years following the effective date of the registration statement of which this prospectus is a part.

The convertible preferred stock warrant is recorded as a liability and adjusted to fair value at each balance sheet date, with the change in fair value being recorded as a component of other income (expense), net in the statements of operations. We will continue to record adjustments to the fair value of the convertible preferred stock warrant until the earlier of the exercise, the expiration of the warrant or the conversion of the underlying convertible preferred stock into common stock, including upon consummation of this offering, at which time the liability will be reclassified to stockholders’ deficit.

Inventory Valuation

Inventory consists primarily of purchased components for assembling MRIdian systems and other direct costs associated with MRIdian system installation. Inventory is stated at the lower of cost (on a first-in, first-out basis) or market value. When the net realizable value of the inventory is lower than related costs, we reduce the carrying value of the inventory for the difference while recording a corresponding charge to cost of product revenues. The assumptions we used in estimating the net realizable value of the inventory primarily include the total cost to complete the applicable MRIdian system. We recorded an inventory lower of cost and market adjustment of $3.7 million, $4.6 million, $3.6 million and $598 thousand during the years ended December 31, 2012 and 2013 and the nine months ended September 30, 2013 and 2014, respectively.

Income Taxes

We are subject to income taxes in the United States, and we use estimates in determining our provision for income taxes. We use the asset and liability method of accounting for income taxes. Under this method, we calculate deferred tax asset or liability account balances at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect our taxable income.

 

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We estimate actual current tax exposure together with assessing temporary differences resulting from differences in accounting for reporting purposes and tax purposes for certain items, such as accruals and allowances not currently deductible for tax purposes. These temporary differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations and comprehensive loss become deductible expenses under applicable income tax laws or when net operating loss or credit carryforwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credit carryforwards can be utilized.

We assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, establish a valuation allowance. At December 31, 2012 and 2013, we have a full valuation allowance set up for our net deferred tax assets.

At December 31, 2013, we had federal net operating loss carryforwards of $92.9 million, which begin to expire in the year ending December 31, 2024, and state net operating loss carryforwards of approximately $0.8 million, which begin to expire in the year ending December 31, 2019. In addition, at December 31, 2013, we had federal research and development tax credit carryforwards of $2.0 million. The federal research and development tax credit carryforwards will expire through the year ending December 31, 2024, if not used. Because of the net operating loss and credit carryforwards, all of our tax years remain subject to federal and California examinations.

Under federal and similar state tax statutes, changes in our ownership, including ownership changes resulting from this offering, may limit our ability to use our available net operating loss and tax credit carryforwards. The annual limitation, as a result of a change of ownership, may result in the expiration of net operating losses and credits before utilization. We believe we have experienced at least one ownership change in the past. We are currently analyzing the tax impact of such ownership change on our federal NOLs and credit carryforwards. Our ability to use our remaining net operating loss carryforwards may be further limited if we experience an ownership change in connection with this offering or as a result of future changes in our stock ownership.

Recently Issued and Adopted Accounting Pronouncements

See Note 2 to our audited financial statements included elsewhere in this prospectus for a description of recently issued and adopted accounting pronouncements.

 

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BUSINESS

Company Overview

We design, manufacture and market MRIdian, the first and only MRI-guided radiation therapy system that images and treats cancer patients simultaneously. MRI is a broadly used imaging tool which has the ability to differentiate between types of soft tissue clearly, unlike X-ray or computed tomography, or CT, the most commonly used imaging technologies in radiation therapy today. MRIdian integrates MRI technology, radiation delivery and our proprietary software to locate, target and track the position and shape of soft-tissue tumors while radiation is delivered. These capabilities allow MRIdian to deliver radiation to the tumor accurately while delivering less radiation to healthy tissue than existing radiation therapy treatments. We believe this leads to improved patient outcomes and reduced side effects from off-target radiation delivery. We received 510(k) marketing clearance from the U.S. Food and Drug Administration, or FDA, for MRIdian in May 2012 and received permission to affix the CE mark in November 2014. Patients are actively receiving treatment on MRIdian systems at three cancer centers.

Cancer is a leading cause of death globally and the second leading cause of death in the United States. Radiation therapy is a common method used to treat cancer that uses lethal doses of ionizing energy to damage genetic material in cells. Nearly two-thirds of all treated cancer patients in the United States will receive some form of radiation therapy during the course of their illness, according to estimates by the American Society for Radiation Oncology, or ASTRO. In 2013, IMV Medical Information Division, Inc., or IMV, reported that 93% of patients receiving radiation therapy in the United States were treated by a linear accelerator, or linac. The global linac market was $2.8 billion in 2011 and was expected to grow to $3.7 billion by 2016 according to a 2012 Markets and Markets report. IAEA Human Health Campus reported that there are over 11,000 linacs installed at over 7,500 centers worldwide. We believe the addressable market for MRIdian is the annual market for linacs due to MRIdian’s ability to treat a broad spectrum of disease sites. However, we believe that MRIdian may be used more frequently for complex cancer cases that may be difficult to treat on a standard linac due to the location of the tumor in relation to the surrounding soft tissues. We currently estimate the annual market for linacs to be 1,100 units per year globally, the majority of which are replacement units.

Despite the prevalence of MRI for diagnostic purposes and its ability to image soft tissue clearly, the radiation therapy industry has been unable to integrate MRI into external-beam radiation therapy systems. Existing radiation therapy systems use X-ray-based imaging technologies, such as CT, which cannot differentiate between types of soft tissue or provide an accurate visualization of a tumor and its position in relation to critical organs. In addition, existing systems that offer imaging during the course of a treatment are limited by the rate at which they can image due to the level of radiation to which they expose the patient. These constraints make it difficult for a clinician to locate a tumor accurately, track its motion in real-time or adapt treatment as anatomy changes. It is very difficult to irradiate a tumor while minimizing the amount of radiation hitting critical organs without the ability to see the tumor’s exact location and shape. If a tumor is insufficiently irradiated, it may not respond to treatment, resulting in a lower probability of survival for the patient. If organs and other healthy soft tissues are irradiated, side effects can be severe, including organ failure and secondary cancers.

MRIdian is a next-generation, radiation therapy solution that enables treatment and real-time imaging of a patient’s anatomy simultaneously. The high-quality images that it generates clearly differentiate 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

 

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benefits to users and patients include improved imaging and patient alignment, on-table adaptive treatment planning, motion management 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 20 different types of cancer, as well as patients for whom radiation therapy was previously not an option.

We currently market MRIdian through a direct sales force in the United States and distributors in the rest of the world. At September 30, 2014, we had three MRIdian systems installed and had six signed orders for new systems for a backlog value of $32.4 million, of which we expect to recognize approximately 30% to 60% as revenue in 2015. We generated revenue of $3.2 million in 2013 and $5.9 million in the nine months ended September 30, 2014 and had net losses of $27.2 million in 2013 and $24.2 million in the nine months ended September 30, 2014.

Cancer and Radiation Therapy Market

Incidence of Cancer

Cancer is a leading cause of death globally and the second leading cause of death in the United States behind cardiovascular disease. According to the American Cancer Society, approximately 1.6 million people are expected to be diagnosed with cancer in the United States during 2014 and approximately 0.6 million are expected to die from cancer, accounting for nearly one of every four deaths. As a result of a growing and aging population, The World Health Organization’s, or the WHO, Global Initiative for Cancer Registry Development estimates that the number of new cancer cases worldwide will grow from 14.1 million in 2008 to 19.3 million in 2025.

Cancer Therapy

The primary goal of cancer therapy is to kill cancerous tissues while minimizing damage to healthy tissues. There are three main ways to treat cancer: surgery, chemotherapy and radiation. Surgery attempts to physically remove the tumor from the body, while minimizing trauma to healthy tissue and preventing the spread or translocation of the disease to other parts of the body. Surgery is particularly effective because the surgeon can directly observe the tumor and surrounding healthy tissue throughout the course of the procedure and adapt his or her plan mid-procedure accordingly. Chemotherapy uses drugs to kill cancer cells. Unlike surgery, most forms of chemotherapy circulate systemically to reach cancer cells almost anywhere in the body. Chemotherapy is most effective at destroying microscopic levels of disease. Radiation is used to damage genetic material in cells with a lethal dose of ionizing energy. Effective radiation therapy balances destroying cancer cells with minimizing damage to normal cells. It can be used at high doses to ablate a tumor, an effect similar to surgery, or at moderate doses to target local microscopic disease, as is done with chemotherapy. Other, more recently developed ways of treating cancer include hormone therapy and targeted therapy, such as immunotherapy.

Radiation Therapy

Radiation therapy has become widespread, with nearly two-thirds of all treated cancer patients in the United States receiving some form of radiation therapy during the course of their treatment, according to estimates by ASTRO. For most cancer types treated with radiation therapy, at least 75% of the patients are treated with the intent to cure the cancer. For lung and brain cancers, that number is somewhat lower, with 59% of lung cancer patients and 50% of brain cancer patients being treated with the goal of curing cancer. The remainder of cases are treated with palliative intent to relieve pain. Radiation therapy is a non-invasive outpatient procedure with little or no recovery time and can be used on patients who are inoperable. According to IMV, 93% of patients receiving radiation therapy in the United States are treated using a linac.

Radiation is used to kill cancer cells primarily by damaging their DNA, but can also kill healthy cells in the same way or cause them to become cancerous themselves. As a result, the goal of curative

 

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radiation therapy is to balance delivery of a sufficiently high dose of radiation to a tumor to kill the cancer cells while, at the same time, minimizing damage to healthy cells, particularly those in critical organs. Normal cells are better able to repair themselves after radiation than tumor cells, so doses of radiation are often fractionated, or delivered in separate sessions with rest periods in between. As a result, standard radiation therapy is often given once a day, five times a week, for one to seven weeks. In 2012, patients made an estimated 20.9 million radiation therapy treatment visits in the United States.

Radiation Therapy Equipment Market

The global linac market was $2.8 billion in 2011 and was expected to grow to $3.7 billion by 2016 according to a 2012 Markets and Markets report. According to IAEA Human Health Campus, there are 11,000 linacs installed at over 7,500 centers worldwide. In the United States, there are 3,800 linacs installed at over 2,500 centers. The annual market for linacs is estimated to be 1,100 units per year globally, the majority of which are replacement units.

In the radiation therapy market, new technologies have historically been adopted at a rapid rate. According to IMV, the percentage of centers performing intensity modulated radiation therapy, or IMRT, grew from 30% in 2002 to 96% in 2012. The percentage of sites utilizing image guided radiation therapy, or IGRT, grew more quickly: from 15% in 2004 to 83% in 2012. The majority of IGRT uses on-board X-ray systems. As leading cancer centers adopt and study MRI-guided radiation therapy, we believe that our next-generation system will also follow a rapid adoption curve among the broader linac replacement market.

Radiation Therapy Treatment Process

Following diagnosis of the disease state, radiation treatment generally consists of the following steps.

 

  n   Imaging and tumor contouring. To design the treatment plan, physicians obtain initial images of the tumor. This is done most commonly using a CT scan, often supplemented by an MRI, a positron emission tomography, or PET, scan, or both. These images, also known as simulation scans, are then imported into a treatment planning software system and aligned to each other. Based on clinical experience, a physician will manually draw, or contour, specific areas on the aligned images to characterize the location and extent of the tumor highlighting the following:

 

  n   Gross tumor volume, or GTV, a volumetric region encompassing the visible tumor.

 

  n   Clinical target volume, or CTV, a larger area encompassing the GTV, where the cancer may have already or may be likely to spread.

 

  n   Planning target volume, or PTV, a further enlarged area to allow for inexact imaging, patient movement during treatment or tumor movement between planning and treatment. The PTV may be sized multiple times larger than the CTV, risking radiation damage to healthy tissue, including in many cases critical organs.

 

  n   Treatment planning and dose prescription. Once the clinician has a three-dimensional map of the tumor, surrounding healthy tissues and nearby critical organs, a physician determines a treatment plan using one of the methods below. Creation of these plans typically takes one to two weeks. A typical curative radiation therapy treatment dose will be delivered over the course of several weeks with 10 to 35 radiation therapy sessions, referred to as fractions, lasting from a few minutes to an hour or more depending on the treatment plan.

 

  n   3D-CRT planning. Using a method called three-dimensional conformal radiation therapy, or 3D-CRT, a clinician will decide what beam angles and shapes to use to target a tumor and how long each beam will irradiate it. A computer will then calculate the potential dose delivered, and a clinician will manually adjust the plan to arrive at an acceptable dose.

 

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  n   IMRT planning. Using a method called intensity modulated radiation therapy, or IMRT, a physician will use computer software to optimize a treatment plan to achieve a more precise dose distribution than 3D-CRT by using thousands of beamlets, IMRT has been shown to result in better patient outcomes than 3D-CRT.

 

  n   SRS and SBRT planning. Stereotactic radiosurgery, or SRS, and stereotactic body radiation therapy, or SBRT, are methods of delivery using 3D-CRT or IMRT designed to deliver high doses of precisely targeted radiation in a reduced number of sessions, usually one to five fractions. SRS is used in brain and spine applications, and has been shown to be particularly effective in those areas, while SBRT is used in the rest of the body, and has been shown to be particularly effective in early-stage lung cancer.

 

  n   Alignment. Prior to radiation delivery, clinicians typically take images to assist with patient alignment. Most systems use a form of on-board CT called cone-beam CT to image, which delivers inferior contrast and a higher radiation dose than diagnostic CT. A less commonly used imaging technology is fluoroscopy, a real-time 2D X-ray system that can expose a patient to even higher doses of radiation than cone-beam CT. Because of the limited soft tissue contrast of X-ray-based imaging, clinicians often use registration markers such as nearby bone structures or surgically implanted fiducial markers to align patients with the treatment beams. Patients may also be immobilized by restraining devices, or techniques such as respiratory control or abdominal compression, which are employed to minimize motion due to breathing. To track breathing and other body motions during treatment, specific trackers may be used, also known as 4D radiation therapy. Use of any image or registration marker to help with alignment is called image-guided radiation therapy, or IGRT.

 

  n   Delivery. Based on alignment with these images, markers or other radiation therapy trackers, treatment begins and radiation is delivered to the patient. In some cases, additional 2D X-ray images are taken intermittently or registration makers are monitored during treatment to try to account for tumor movement.

 

  n   Review. After a treatment session, a physician will review the delivered treatment to ensure that it is proceeding according to plan. Currently, there are no methods to record the actual dose that was delivered to the tumor and nearby critical structures. In those rare occasions when a physician is able to observe changes in the size or shape of a tumor, he or she may decide to adjust the treatment plan. However, revising a treatment plan may take several days and delays treatment.

Limitations of Radiation Therapy

Limitations with radiation therapy arise as a result of imaging technologies that make accurate visualization of a tumor and its relation to critical organs difficult or impossible during treatment. As a result, we believe treatments are not as effective or safe as they could be.

 

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  n   Inability to accurately locate a tumor for treatment alignment. To locate a tumor, current radiation therapy systems rely on on-table CT scans which are unable to differentiate between types of soft tissue. Therefore, surrogate registration markers, including existing bone structures, external marks and surgically implanted fiducials, are frequently used to align a patient to the treatment beams prior to commencing treatment.

 

Comparison of On-Table CT Images to On-Table MRIdian Images

 

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The spatial relationship between the tumors, particularly those in soft tissue, and registration markers is likely to change between initial imaging and the first treatment session. By relying on a proxy for tumor location rather than the tumor itself, clinicians risk missing the tumor when they deliver treatment beams into a patient’s body. Furthermore, fiducial markers can migrate inside the body, are unable to track changes in the tumor shape, may interfere with imaging, are invasive, require time to heal and have a high incidence of side effects and complications.

 

  n  

Inability to adapt treatment on table. A physician designs a treatment plan and dose prescription based on images that are captured at the beginning of therapy. Creating a treatment plan can take one to two weeks, and treatment itself can take up to seven weeks. However, during the course of therapy, tumors often change size, orientation or shape and

 

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patient anatomy can change for reasons such as weight loss or gain. Adjusting for these changes would require replanning which may take several days and is resource intensive. In addition, due to limitations in imaging technologies, physicians may be unaware of changes in the tumor and surrounding anatomy and continue to dose according to the original treatment plan. As a result of these limitations, replanning is infrequently performed.

 

  n   Inability to track tumor and organ motion accurately. In addition to difficulty locating a tumor accurately in a patient’s body, a further challenge is accounting for ongoing tumor movement during treatment. Tumors have been shown to move multiple centimeters relative to surrogate registration markers over the course of only a few seconds. Although physicians use internal markers and external cameras and blocks to track respiratory and other motion, they are unable to track the tumor itself and its location relative to other soft tissues. This limitation increases the probability of missing the targeted treatment area. As a result, physicians usually enlarge the total region to be irradiated, or the PTV, causing an additional risk of side effects.

 

  n   Inability to record cumulative radiation delivered. In order to determine treatment effectiveness, it is important to track how much radiation has been delivered to a tumor or surrounding healthy tissue. Currently, there are no methods to record the actual dose of radiation that was delivered to the tumor and nearby critical structures. Therefore, physicians must assume that the radiation is delivered according to plan, rather than making decisions based on actual dose delivered.

Each of these limitations increases the risk of missing a tumor and hitting healthy tissue during treatment. If a tumor is insufficiently irradiated, it may not respond to treatment, resulting in a lower probability of survival for the patient. The ability to avoid irradiating healthy tissue has been shown to reduce side effects. If healthy tissues, particularly critical organs, are irradiated, the side effects can be severe, including scarring of lung tissue, fibrosis and cardiotoxicity in lung and breast cancers, incontinence and sexual dysfunction in pelvic and prostate cancers, infertility in pediatric cancers, memory loss, seizures and necrosis in brain cancer and secondary cancers.

Although MR technology is an imaging tool broadly used to differentiate between types of soft tissue in diagnostic settings, to date such technology has not been used with radiation therapy because the magnetic field generated by an MRI interferes with the linac’s ability to accelerate electrons and the linac produces radio frequencies that distort the MR images. Current forms of CT have improved over time, but issues with radiation dose and image quality limit the utility of these technologies. Fluoroscopy and cone-beam CT involve the use of X-rays, a form of ionizing radiation, and pose an increased risk of radiation-induced cancer to the patient.

Our Solution

We have developed MRIdian to address the key limitations of existing external-beam radiation therapy technologies. MRIdian employs MRI-based technology to provide real-time imaging that clearly defines the targeted tumor from the surrounding soft tissue and other critical organs during radiation treatment. MRIdian allows physicians to record the level of radiation exposure that the tumor has received and adapt the prescription between fractions as needed. We believe this combination of enhanced visualization and accurate dose recording will significantly improve the safety and efficacy of radiation therapy, leading to better outcomes for patients.

We believe that MRIdian provides the following clinical and commercial benefits to physicians, hospitals and patients:

 

  n  

Improved tumor visibility and patient alignment. The soft-tissue contrast of MRidian’s on-board MRI enables clinicians to locate, target and track the tumor and healthy tissues and accurately align a patient to the treatment beams without the use of X-ray, CT or surrogate

 

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registration markers. If the clinician prefers, the software has the ability to automatically map the patient’s soft tissue anatomy each treatment session in less than one minute, and MRIdian can use that information to automatically align the patient.

 

  n   On-table adaptive planning. Due to changing anatomy the clinician may be unable to obtain an optimal match between the patient on the table and the treatment plan. Using an MR image captured at the beginning of each therapy session, MRIdian automatically maps the patients’ soft tissue anatomy in 3D and calculates the dose that would be delivered using the current treatment plan. If the prescribed treatment is not clinically acceptable to the physician, MRIdian has the ability to automatically recalculate and adapt the plan to changing anatomy at the time of treatment. Utilizing our proprietary Monte Carlo algorithm and software, replanning can be done in less than two minutes while the patient is on the table. We believe hospitals will be able to bill incrementally for this replanning.

 

  n   Ability to track tumors and manage patient motion. MRIdian can capture multiple soft-tissue imaging planes concurrently during treatment, refreshing the image multiple times per second. This real-time imaging enables the physician to track the movement of the tumor and the surrounding healthy tissue directly, rather than relying on registration markers such as existing bones or implanted fiducials. If a tumor or critical organ moves beyond a physician-defined boundary, the treatment beam automatically pauses. This beam control becomes especially important in the situations where a tumor may be in close proximity to a critical organ, such as the heart during lung and breast cancer treatments or the rectum during prostate cancer treatments. This knowledge of the tumor location has enabled physicians to treat patients who would not previously have been considered radiation therapy candidates.

 

  n   Record and evaluate the delivered dose. Using our proprietary algorithm and advanced MR imaging, MRIdian calculates the dose delivered after each treatment, enabling the physician to review and re-optimize the patient’s treatment session if needed. In addition, MRIdian can utilize diagnostic CT images that are fused with the MR images at each treatment in order to more accurately calculate dose. MRIdian also captures and records a video, known as a MRIdian Movie, of the delivered treatments which can be evaluated by the physician or shared with patients.

 

  n   Fits into existing treatment paradigms and workflow. MRIdian can be used for 3D-CRT, IMRT, IGRT, SBRT and SRS and can also be used to treat a broad spectrum of disease sites. In addition, we believe MRIdian’s increased target accuracy will allow physicians to treat patients with higher doses over fewer treatment fractions and potentially improve patient throughput and efficiency. MRIdian fits inside most standard radiation therapy vaults without significant modifications and is supported by existing codes that are available for linac reimbursement.

We believe the ability to image with MRI and treat cancer patients simultaneously will lead to improved patient outcomes and reduced side effects from off-target radiation delivery.

Our Strategy

Our objective is to make MRI-guided radiation delivery the standard of care for radiation therapy. To achieve this goal, we intend to do the following:

 

  n  

Target top-tier hospitals in initial global sales efforts to influence and increase market adoption. We intend to market MRIdian to a broad range of customers worldwide, including university research and teaching hospitals, private practices, community hospitals, government institutions and freestanding cancer centers. We are initially focusing on the leading hospitals worldwide which are typically early adopters of best-in-class technology and are able to influence and promote adoption by other centers both locally and globally. We plan to continue to work with these institutions to position MRIdian as a marketing tool they can use to

 

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differentiate their offerings from their peers and promote broader market awareness on the benefits of MRI-guided radiation therapy.

 

  n   Commercialize MRIdian with a targeted sales force in the United States and through distributors in international markets. We intend to market MRIdian through a combination of direct sales and distributors. We are building a small, specialty sales force for the United States and Canada and are using distributors in international markets. At October 31, 2014, we had two signed orders with U.S. customers and four signed orders with customers outside the United States for new MRIdian systems, and we intend to continue to expand our presence in key markets to capitalize on the growing international opportunity for MRIdian. We are engaging distributors and seeking government approval where needed to market MRIdian in China, Japan, Taiwan, Russia, Hong Kong, Turkey and Korea, and we intend to work with distributors and regulators in other countries in the future.

 

  n   Increase broader awareness of MRIdian’s capabilities to expand our share of the radiation therapy market. We intend to educate radiation oncologists about the capabilities and resulting benefits of MRIdian over traditional radiation therapy systems. In order to drive awareness and adoption, we also intend to support the publication of clinical and scientific data and analysis, work with key opinion leaders, present at leading academic conferences and engage in outreach at leading hospitals worldwide. We also plan to leverage our existing customer network as a reference for new potential users to experience our technology in use in the clinical setting.

 

  n   Maintain our competitive lead in MRI-guided radiation therapy through continued innovation. We plan to continue to invest in our technology to maintain our leadership position in the emerging MRI-guided radiation therapy market. We intend to develop and introduce enhancements to the system and software to provide improved capabilities for MRIdian users and patients. In addition, we plan to explore potential benefits of integrating our MRI technology with alternative beam technologies. We believe we have a strong intellectual property portfolio that covers the MRIdian system as well as critical design elements and key aspects of its subsystem and components. We will continue to enhance this portfolio as we develop new features and technologies.

 

  n   Continue to work with leading hospitals to optimize efficiency and patient throughput. We strive to maximize the efficiency and effectiveness of the MRIdian system for our customers. We plan to continue to work closely with key opinion leaders, clinicians and hospitals in a proactive manner to determine how best to refine and improve MRIdian’s features, optimize workflow and maximize patient throughput. We utilize this customer feedback to guide product development and increase MRIdian’s reliability and efficiency, which we believe will result in positive experiences for our customers and ensure their continued usage and recommendation of MRIdian.

 

  n   Drive cost reductions in the design and manufacture of MRIdian and improve our margins. We plan to continue to explore ways to bring down our cost of goods to improve margins for MRIdian. We believe we can reduce costs in the design and manufacture of MRIdian.

 

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MRIdian

MRIdian is a next-generation, MRI-guided radiation therapy system that is comprised of four major components, (i) the MRI system, (ii) the radiation delivery system, (iii) integrated treatment planning and delivery software and (iv) a safety and control system.

MRIdian

 

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MRI System

The MRI system is the component of MRIdian that captures soft tissue images of the patient’s body. To address the technical complications that arise from combining an MRI with a linac, we have designed a proprietary split superconducting magnet that allows treatment through a central gap, eliminating MRI components in the path of the beam. Our MRI system captures and displays live, high-quality images in three planes at two frames per second or in one plane at four frames per second. The images are used to track tissues and control radiation treatment beam delivery.

While other MRI systems in development utilize a high field strength magnet to provide a clearer image, use of higher field strength magnets results in distortions of soft tissue images by up to approximately six millimeters at 1.5 tesla and unfavorable dose distribution distortions, which are unacceptable for delivering accurate radiation therapy. We have engineered our MRI system to be able to produce clear images using a low field strength 0.35 tesla magnet which enables us to avoid the image and dose distortions that are a result of using a higher field strength magnet. In addition, MRIdian’s 0.35 tesla field strength prevents heating of the patient during uninterrupted imaging, which could occur in a higher field strength magnet requiring the imaging to be discontinued or interrupted.

 

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MRI System

 

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Radiation Delivery System

Radiation is delivered from three Cobalt-60 radiation therapy heads symmetrically mounted on a rotating ring gantry, providing full 360 degree coverage and simultaneous dose delivery, as opposed to prior Cobalt-60 systems that have historically been limited by imprecise radiation dose applications. Each head is equipped with a double focused multi-leaf collimator, designed to overcome the wide-beam edge of previous-generation Cobalt-60 systems and shape the beam for precision radiation therapy treatments. It allows the delivery of treatment plans for 3D-CRT, IMRT and SBRT that are clinically equivalent to those produced on the most advanced linear accelerators available today. Stereotactic procedures are possible with a positioning accuracy of less than one millimeter. Cobalt-60 is used because it does not create any radio frequency which interferes with the MRI.

Comparison of Previous-Generation Cobalt Beam to ViewRay Cobalt Beam

 

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Integrated Treatment Planning and Delivery Software

Our treatment planning and delivery software can create treatment plans and manage the treatment delivery process. It is designed to create optimized 3D-CRT, IMRT and SBRT plans for delivery on MRIdian.

Using this software, the on-table adaptive planning process typically takes less than two minutes, and includes: auto-contouring, dose prediction and treatment plan optimization. For contouring, the software will automatically draw the outline of the tumor and nearby organs. The clinician can then make refinements before treatment, if necessary. Dose prediction can be calculated immediately before treatment, allowing the current state of the patient’s anatomy to be taken into account. The software can generate an optimal treatment plan solution in less than one minute, allowing it to re-plan while the patient is on the treatment couch.

MRIdian has soft-tissue tracking beam control capability. While the radiation dose is being delivered, the software analyzes the acquired images and can determine tumor or organ location relative to set tolerances. If the targeted tumor or a critical organ moves beyond a physician-defined boundary, the treatment beams will automatically pause. When the tumor moves back into the target zone, the treatment will automatically resume. Physicians can set both spatial and time thresholds for pausing treatment delivery. This enables the system to account for tumor and patient motion during treatment.

The software archives all the information generated during treatment and builds a database of patient-specific planning, delivery and imaging data. It also includes a review tool which provides clinicians with a visual comparison of the delivered versus planned treatment. At the end of each treatment, the software determines the delivered dose by combining the recorded actions of the radiation delivery system with the daily image and auto-contouring of the patient. With this information, clinicians can fine-tune prescriptions based on the actual dose delivered. In addition, it provides a MRIdian Movie of each delivered treatment which can be evaluated by the physician or exported and shared with the patient.

Safety and Control System

In addition to complying with the applicable FDA and Nuclear Regulatory Commission, or NRC, requirements, the radiation delivery subsystem also meets a double fault tolerant design standard and has redundant safety systems. If any two components in the radiation delivery subsystem fail simultaneously, such as power and pneumatics, the system reverts to a safe state. MRIdian also contains redundant computer control for safety and system logging and double encoders on all axes of motion for safety. The control system continuously monitors performance to ensure all systems are performing and communicating appropriately.

Installed Base and Clinical Use

We received initial 510(k) marketing clearance from the FDA for our treatment planning and delivery software in January 2011 and for MRIdian in May 2012. We also received permission to affix the CE mark in November 2014, allowing MRIdian to be sold within the EEA. We received a license and permission to import MRIdian into the United Arab Emirates in December 2014. We received regulatory approval in Italy in January 2015, which is required in addition to the CE mark. We are currently seeking government approval to market MRIdian in China, Japan, Taiwan, Russia, Hong Kong, Turkey and Korea. Other countries where we will be seeking approval in the near term are Canada, Egypt and Australia. We may also seek required approvals in other countries in the future.

We have three units installed at three leading cancer centers in the United States including Washington University and Siteman Cancer Center at Barnes-Jewish Hospital, or Washington University in St. Louis, University of California, Los Angeles Health System and Jonsson

 

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Comprehensive Cancer Center, or University of California, Los Angeles, and The University of Wisconsin Carbone Cancer Center, or the University of Wisconsin–Madison. In January 2014, Washington University, a National Cancer Institute Designated Comprehensive Cancer Center, became the first center to treat patients with MRIdian. Washington University in St. Louis is scaling up its use of MRIdian in its clinical practice, and is now treating as many as 15 patients per day. In September 2014, Washington University in St. Louis used MRIdian to perform the first on-table adaptive treatments as part of an ongoing clinical service. Also in September 2014, the University of Wisconsin–Madison treated its first patients with MRIdian and became the first center to employ the soft-tissue tracking beam control capability unique to MRIdian. In October 2014, University of California, Los Angeles, became the third center to use MRIdian in clinical practice. We are working with each of these centers to determine how best to refine and improve MRIdian’s features, optimize workflow and maximize patient throughput.

At October 31, 2014, over 80 patients have received over 1,200 treatment sessions at these centers using MRIdian in over 20 different disease sites. These included cancers of the prostate, breast, lung, colorectal and bladder, which are among the most prevalent types of cancer in the United States according to the Centers for Disease Control and Prevention, or CDC, as well as the liver, stomach, esophagus and pancreas, which are among the most prevalent types of cancer outside of the United States according to the WHO.

Backlog

In 2013, we executed new sales contracts with a total value of $17.4 million, and in the nine months ended September 30, 2014, we executed new sales contracts with a total value of $15.3 million. At September 30, 2014, we had six signed sales contracts for MRIdian systems in backlog with a total value of $32.4 million, of which we expect to recognize approximately 30% to 60% as revenue in 2015.

We define backlog as the accumulation of all orders for which revenue has not been recognized and we consider valid. Backlog includes customer deposits which are recorded as a liability 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. Typically, an order is included in backlog once a written agreement for the delivery of a MRIdian is executed, and we have received a material deposit. We perform a quarterly review of backlog to verify that outstanding orders in backlog remain valid, and based upon this review, orders that are not expected to result in revenue are removed from backlog. Our criteria include an outstanding and effective written agreement for the delivery of a MRIdian, any changes in customer or distributor plans, the customer’s or distributor’s continued ability to fulfill the order contract and the status of regulatory approval.

Installation Process

Following execution of a contract, it generally takes nine to 12 months for a customer to prepare an existing facility or construct a new vault. Upon the commencement of installation at a customer’s facility, it typically takes two to three months to complete the installation and on-site testing of the system, including the completion of acceptance test procedures. MRIdian is designed to fit into a typical radiation therapy vault, similar to other replacement linear accelerators. MRIdian’s components all fit through standard hospital vault entrances for assembly. On-site training takes approximately one week and can be conducted concurrent with installation and acceptance testing.

Our customers are responsible for removing any outgoing linear accelerator and preparing the mounting pad, power and support system connections. Additional room modifications required are consistent with those generally required for MRI systems such as radio frequency shielding of the room and additional power.

 

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Clinical Development

To date, we have primarily relied on clinical symposia and case studies presented at ASTRO to raise awareness of MRI-guided radiation therapy and to market MRIdian to leading cancer centers. In order to promote broader adoption rates at other cancer centers and hospitals, we plan to work with our customers to collect and publish data on clinical efficacy, treatment times and clinical results for patients who have been treated on a MRIdian. While we do not currently have statistically significant, objective evidence that MRIdian improves patient outcomes or decreases healthcare costs, we are currently sponsoring two studies at Washington University in St. Louis to compare MRIdian to other IGRT systems. We plan to continue to support further studies to demonstrate the benefits of MRI-guided radiation therapy and adaptive treatment planning. As data accumulate from the use of MRIdian, we plan to work with professional healthcare organizations to further support global marketing efforts, additional product clearances, approvals and/or registrations and potential improvements in reimbursement.

Selling and Marketing

We currently market MRIdian through a direct sales force in the United States and distributors in the rest of the world. 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 cycle varies based on the customer and can be lengthy, sometimes lasting up to 18 to 24 months or more from initial customer contact to contract execution.

To sell MRIdian globally, we use a combination of sales executives, sales directors and a network of international third-party distributors with internal support from sales operations, product management and application specialists. A targeted group of three sales directors and one vice president are responsible for selling MRIdian within the United States. Our product management function helps market MRIdian and works with our engineering group to identify and develop upgrades and enhancements. We also have a team of application specialists who provide post-sales support.

Although we do not currently engage in advertising efforts, our selling and marketing practices include participating in trade shows and symposia.

Competition

We compete directly with companies marketing IGRT devices for the treatment of cancer using CT, ultrasound, optical tracking and X-ray imaging. We also compete with companies developing next-generation IGRT devices, specifically those developing MRI-guided devices, amongst others. We expect technological advances, including the ability to provide real-time imaging, clinical outcomes, size, price, operational complexity and operational efficiency to drive competitive market dynamics.

Our major competitors with devices approved for distribution in the United States or globally include Varian Medical Systems, Inc., or Varian, Elekta AB, or Elekta, and Accuray Incorporated. Many of our direct competitors have greater financial, sales and marketing, service infrastructure and research and development capabilities than we do, as well as more established reputations and current market share. The main limitations of currently approved devices are the lack of real-time, clear images before and during the treatment, as well as the ability to perform on-table adaptive planning.

We are also aware of two commercial and two academic ongoing research efforts to develop radiation therapy systems incorporating MRI. Elekta and Royal Philips have formed a consortium to develop the Elekta-Philips MRI-linac, and Varian is working with IMRIS on a multi-room configuration combining IMRIS’s MR imaging technology with Varian’s TrueBeam radiation system. The University of Sydney, Ingham Institute and the University of Queensland have formed a partnership to develop an

 

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MRI-linac and the University of Alberta’s Cross Cancer Institute is working on an MRI-linac as well. Although these academic research efforts may not compete directly with us commercially, if one of our competitors were to form a partnership with one of these institutions to commercialize their system, it could impact our sales negatively. Of these four, we believe the Elekta-Philips MRI-linac is the most advanced in development, although we believe this system is still years away from approval. MRIdian is the first and only commercially available MRI-guided radiation therapy device to image and treat cancer patients simultaneously.

The limited capital expenditure budgets of our customers results in all suppliers to these entities competing for a limited pool of funds. Our customers may be required to select between two items of capital equipment. For example, some of our potential customers are considering expensive proton therapy systems which could consume a significant portion of their capital expenditure budgets.

Manufacturing

We have adopted a model in which we rely on subsystem manufacturing, assembly and testing by our key suppliers. The MRIdian system is integrated at the customer site. Through this approach, we avoid the majority of the fixed cost structure of manufacturing facilities. We purchase major components and subsystems for MRIdian from national and international third-party OEM suppliers and contract manufacturers. These major components include the magnet, MRI electronics, ring gantry, radiation therapy heads, Cobalt-60 sources, multi-leaf collimators, patient-treatment table and computers. We also directly purchase minor components and parts. At the customer site, we assemble and integrate these components with our proprietary software and perform multiple levels of testing and qualification. The system undergoes a final acceptance test, which is performed in conjunction with the customer.

Many of the major subsystems and components of MRIdian are currently procured through single and sole source suppliers. Among these are the magnet, MRI electronics, MRI coils, ring gantry, radiation-therapy heads, Cobalt-60 sources, multi-leaf collimators, and the patient-treatment table. We have entered into multi-year supply agreements for all major components and subsystems. Our master services agreement with Siemens Aktiengesellschaft, Healthcare Sector and our amended and restated joint development and supply agreement with Euromechanics Medical GmbH have each expired by their terms. We do not believe that either expiration will have a negative impact on our manufacturing operations or business because we are currently negotiating extensions of each agreement and we and each respective third party are continuing to operate under these agreements as if the agreements had not expired during these negotiations. Except for the MRI power, control and image reconstruction subsystem, we own the design of all other major subsystems and components.

We manage our supplier relationships with scheduled business reviews and periodic program updates. We closely monitor supplier quality and delivery performance to ensure compliance with all MRIdian system specifications. We believe our supply chain has adequate capacity to meet our projected sales over the next several years.

Intellectual Property

The proprietary nature of, and protection for, MRIdian components, new technologies, processes and know-how are important to our business. Our policy is to seek patent protection in the United States and in certain foreign jurisdictions for our MRIdian systems and other technology where available and when appropriate. We also in-license technology, inventions and improvements we consider important to the development of our business.

We hold the exclusive worldwide license for certain patents and applications covering our combination of MRI and radiation therapy technologies. Specifically, we hold a license to two issued U.S. patents, two pending U.S. applications, 13 issued foreign patents (eight of which were issued in

 

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Great Britain, Germany, France and the Netherlands as a result of two applications filed and allowed through the European Patent Office) and five pending foreign applications at November 1, 2014. We own an additional four issued U.S. patents, one issued foreign patent, 15 pending U.S. patent applications and 46 pending foreign patent applications, and at November 1, 2014, three of our U.S. applications and four of our foreign applications are allowed. Assuming all required fees are paid, individual patents or applications owned or licensed by us will expire between 2025 and 2034. We also have a joint ownership interest with Case Western Reserve University in one U.S. patent application.

Our portfolio includes patents and patent applications directed to system-wide aspects of MRIdian and to key aspects of its subsystems and components. The initial licensed patents for our core technology broadly cover the simultaneous use of MR imaging and isotopic external-beam radiation therapy. Such patents have been granted in the United States, Europe, Hong Kong, Australia and Japan, and additional related applications remain pending in China, Canada, the United States, Australia and Japan. In the United States we have pending continuation applications of the licensed patents that extend this core technology to alternate beam technologies. Additionally, we have patents and patent applications that cover critical design elements including, among others, our approach to Cobalt IMRT, our methods for integrating MRI and the radiation delivery system, and the design of our disassemblable (“pop apart”) magnet which enables the MRI sub-system to fit into most standard radiation therapy vaults. The United States application on our approach to Cobalt IMRT has been allowed, the application on our split gradient coil has been issued in the United States and has been allowed in Australia and China and numerous applications on other design elements are pending in the United States and foreign jurisdictions. In addition, we have a U.S. patent and U.S. and foreign applications that cover the use of MRI imaging at a frequency sufficient to account for real-time organ motion to provide video rate tissue tracking in disciplines outside of radiation therapy.

We continue to review new technological developments in our system and in the field as a whole in order to make decisions about what filings would be most appropriate for us. An additional key component of our intellectual property is our proprietary software used in planning and delivering MRIdian’s therapeutic radiation dose.

In December 2004, we entered into a licensing agreement with the University of Florida Research Foundation, Inc., or UFRF, whereby UFRF granted us a worldwide exclusive license to certain of UFRF’s patents in exchange for 82,017 shares of common stock and a royalty from sales of products developed and sold by us utilizing the licensed patents. We were obligated to meet certain product development and commercialization milestones by various dates through December 31, 2014. The significant milestones met prior to December 31, 2013 included: (i) completion of a business plan and Small Business Technology Transfer grant application; (ii) securing a minimum of $20.0 million venture financing; (iii) successful relocation and build out of the company’s headquarters; (iv) receipt of the first magnet from an OEM partner; (v) hiring of a chief executive officer with industry experience in developing and commercializing similar products; and (vi) filing for FDA approval. The final milestone, which required us to recognize the first commercial sale of the MRIdian system to retail customers by December 31, 2014, was met during the year ended December 31, 2013. If these milestones had not been accomplished, UFRF would have had the right to terminate the licensing agreement. Royalty payments are based on 1% of net sales, defined as the amount collected on sales of licensed products and/or licensed processes after deducting trade and/or quantity discounts, credits on returns and allowances, outbound transportation costs paid and sales tax. Minimum quarterly royalty payments of $50 thousand commenced with the quarter ended March 31, 2014 and are payable in advance. Minimum royalties paid in any calendar year will be credited against earned royalties for such calendar year. The royalty payments continue until the earlier of (i) the date that no licensed patents remain enforceable or (ii) the payment of earned royalties, once begun in 2014, cease for more than four consecutive calendars quarters.

 

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In addition to our patents, we also rely upon trade secrets, know-how, trademarks, copyright protection and continuing technological and licensing opportunities to develop and maintain our competitive position. We have periodically monitored and continue to monitor the activities of our competitors and other third parties with respect to their use of intellectual property. We require our employees, consultants and outside scientific collaborators to execute confidentiality and invention assignment agreements upon commencing employment or consulting relationships with us. Despite these safeguards, any of our know-how or trade secrets not protected by a patent could be disclosed to, or independently developed by, a competitor.

Coverage and Reimbursement

Reimbursement rates in the United States have generally supported a favorable return on investment for the purchase of new radiotherapy equipment, including MRIdian. Payments for standard radiation therapy treatments using MRIdian, including 3D-CRT, IMRT and SBRT, are generally covered and reimbursed under existing Current Procedural Terminology, or CPT, codes and policies currently in place. User experience to date indicates that our initial customers have treated a wide spectrum of different patients and treatment modalities using MRIdian. Physicians use the MRIdian system’s on-board MRI to perform a complex simulation weekly for IMRT or daily for SBRT, special physics consult and adaptive re-planning. Each of these are distinct procedures which can be billed by physicians using existing CPT codes, so long as such procedures meet medical necessity and other coverage criteria as established by government and other third-party payors.

Third-party payors, including governmental healthcare programs such as Medicare and Medicaid, establish coverage policies and reimbursement rates for diagnostic examinations and therapeutic procedures performed by physicians in hospitals and free-standing clinics. Private insurers often model their payment rates and coverage policies based on those established by the government. The U.S. Congress from time to time considers various Medicare and other healthcare reform proposals that could affect both private and public third-party payor coverage and reimbursement for healthcare services provided in hospitals and clinics. In addition, third-party payors regularly update reimbursement amounts, including annual updates to payments to physicians, hospitals and clinics for medical procedures, including radiation treatments using MRIdian.

In its final rule for the Hospital Outpatient Prospective Payment System, or HOPPS, effective January 1, 2015, CMS will implement changes in the coding system to simplify the billing of conventional radiation therapy performed in the hospital outpatient setting into three levels – simple, intermediate or complex – and to simplify the billing of IMRT into two levels, simple or complex. Simple IMRT treatments (e.g., breast and prostate) may be paid at a lower rate than complex IMRT, which includes all other disease sites. We believe that MRIdian will tend to be used for a higher proportion of complex treatments than other radiation therapy systems, and accordingly, we believe that the new rules will have a small impact on our customers.

The HOPPS changes to simplify the billing for conventional radiation therapy and IMRT are further indicative of an overall U.S. health policy trend towards cost containment. Whether this trend results in capitated payments per patient or case payment per procedure, we believe MRIdian’s capability of enabling physicians to visualize the treatment area and adapt therapy in real-time to maximize the clinical benefit to the patient will result in cost savings to both providers and third-party payors.

We plan to work with our customers to collect and publish data on clinical results for patients who have undergone procedures on MRIdian. We are currently sponsoring a study that is estimated to be completed in 2017 at Washington University in St. Louis to compare MRIdian to other IGRT systems, and we plan to continue to support further studies to demonstrate the benefits of MRI-guided radiation therapy and adaptive treatment planning. As data accumulate from the use of our system, we plan to work with professional healthcare organizations to further support global marketing efforts, additional product

 

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clearances, approvals and/or registrations and potential improvements in reimbursement. Additionally, we currently provide reimbursement support to our customers through a third-party vendor.

Foreign Reimbursement Regulations

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 is slower outside of the United States. Our ability to achieve adoption of MRIdian as well as significant sales volume in international markets we enter will depend in part on the availability of reimbursement for procedures performed using MRIdian.

Research and Development

Continued innovation and development of advanced technologies is critical to our goal of making MRI-guided radiation therapy the standard of care for cancer treatment. Our current development activities include improvements in and expansion of product capabilities, continued clinical workflow refinements, design improvements to reduce system costs and improvements in reliability.

The modular design of MRIdian enables the development of new capabilities and performance enhancements by generally allowing each subsystem to evolve within the overall platform design. Access to regular MRIdian upgrades protects customer investment in MRIdian, and facilitates the adoption of new features and capabilities among existing installed base customers. We expect these upgrades will generally consist of new software features and MRI imaging enhancements designed to leverage the capabilities of MRIdian’s on-table adaptive planning, real-time tumor tracking, and the other inherent capabilities of MRI imaging technologies, as well as hardware enhancements as they become available. Ultimately we have a vision of expanding the system’s on-table adaptive feature into a continuously-adaptive capability, which adjusts and corrects for any changes as they happen, on the table, in real-time.

In addition, we believe our existing and expanding IP portfolio will enable us to continuously develop innovative technologies to further strengthen the differentiation of MRIdian in the marketplace. Magnetic resonance imaging is a powerful and versatile measurement technique and is widely used throughout radiology and medicine because of its ability to generate information about tissues and disease states.

At September 30, 2014, we had a total of 28 employees in our research and development departments. Research and development expenses were $8.2 million, $8.8 million and $7.5 million for 2012, 2013 and the nine months ended September 30, 2014, respectively. We plan to continue to increase our investment in research and development in future periods.

Government Regulation

U.S. Medical Device Regulation and Nuclear Materials Regulation

As a manufacturer and seller of medical devices and devices that deliver radiation, we and some of our suppliers and distributors are subject to extensive and rigorous regulation by the FDA, the NRC, other federal, state and local authorities in the United States and foreign regulatory authorities. Regulations promulgated by the FDA relating to medical devices and radiation-producing devices govern, among other things, the following activities that we perform or that are performed on our behalf, and that we will continue to perform or have performed on our behalf:

 

  n   product design, development and testing;

 

  n   manufacturing;

 

  n   approval or clearance;

 

  n   packaging, labeling and storage;

 

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  n   marketing, advertising and promotion;

 

  n   distribution, including importing and exporting;

 

  n   installation;

 

  n   possession and disposal;

 

  n   record keeping;

 

  n   service and surveillance, including post-approval monitoring and reporting;

 

  n   complaint handling; and

 

  n   repair or recall of products and issuance of field safety corrective actions.

FDA Clearance and Approval of Medical Devices

The FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution, and production of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. Unless an exemption applies, the FDA requires that all new medical devices and all marketed medical devices that have been significantly changed, or that will be marketed with a new indication for use, obtain either clearance via a 510(k) pre-market notification or approval via a Premarket Approval, or PMA, application before the manufacturer may commercially distribute the product in the United States. The type of marketing authorization necessary is generally linked to the classification of the device. The FDA classifies medical devices into one of three classes. Devices deemed to pose the lowest risk are placed in Class I, and most Class I devices are exempt from premarket notification requirements. Class I devices are those for which safety and effectiveness can be reasonably assured by adherence to a set of regulations referred to as General Controls, which require compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, and regulations regarding facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. However, some Class I devices, called Class I reserved devices, also require premarket clearance by the FDA through the 510(k) premarket notification process described below.

Moderate risk devices are placed in Class II and are subject to General Controls as well as Special Controls, which can include performance standards, guidelines and post-market surveillance. Most Class II devices are subject to premarket review and clearance by the FDA pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDCA.

Devices deemed by the FDA to pose the greatest risk, 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. Class III devices require FDA approval of a PMA prior to marketing.

MRIdian has been classified as a Class II medical device subject to the 510(k) clearance process.

510(k) clearance process. Most Class II devices are subject to premarket review and clearance by the FDA. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification process. Under the 510(k) process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to either:

 

  n   a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted; or

 

  n   another commercially available, similar device that was cleared through the 510(k) process.

To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device and either have the same technological characteristics as the predicate device or

 

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have different technological characteristics and not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence.

The process of obtaining 510(k) clearance usually takes from three to 12 months from the date the application is filed and generally requires submitting supporting design and test data, which can be extensive and can prolong the process for a considerable period of time. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. We received our 510(k) clearances for the treatment planning and delivery software system in January 2011 and for MRIdian in May 2012.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in the intended use of the device, may require a new 510(k) clearance or, depending on the modification, could require approval of a PMA. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with the manufacturer’s decision, it may retroactively require the manufacturer to submit a request for 510(k) clearance or PMA approval and can require the manufacturer to cease marketing and/or recall the product until 510(k) clearance or PMA approval is obtained. Since obtaining 510(k) clearances in 2011 and 2012, we have made changes to MRIdian that we believe do not require new 510(k) clearance.

Premarket application approval process. Submission and approval of a PMA is required before marketing of a Class III product may proceed. Under the PMA application process, the applicant must generally conduct at least one clinical investigation and submit extensive data and clinical information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA application typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies. The PMA process is much more demanding than the 510(k) premarket notification process.

Following receipt of a PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for filing and begin the review. The FDA, by statute and by regulation, has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA. Before approving or denying a PMA, an FDA advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. Overall, the PMA application process typically takes between one to three years, but may take significantly longer. The FDA may approve a PMA application with post-approval conditions intended to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, user training requirements, restrictions on promotion, sale and distribution, and requirements for the collection of long-term follow-up data.

MRIdian is not currently approved under a PMA approval, and we have no plans for any indication or system improvements or extensions that we believe would require a PMA.

Clinical trials. Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) clearance. Such trials require submission of an investigational device exemption, or IDE, application to the FDA for a specified number of patients and study sites, unless the

 

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product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. If an IDE is required, the FDA and the appropriate institutional review boards, or IRBs, at the clinical sites must approve the study before clinical trials may begin. If the device is considered a non-significant risk device, IDE submission to FDA is not required. Instead, only approval from the IRB overseeing the clinical trial is required. Clinical trials are subject to extensive monitoring, record keeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, the patient’s informed consent must be obtained in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. The clinical trial sponsor, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and effectiveness of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product.

Continuing FDA regulation. Any devices we manufacture or distribute pursuant to 510(k) clearance or PMA approval by the FDA are subject to pervasive and continuing regulation by the FDA and certain state agencies. These include product listing and establishment registration requirements, which help facilitate FDA inspections and other regulatory actions.

In addition, our manufacturing operations for medical devices and those of our suppliers must comply with the FDA’s QSR. The QSR requires that each manufacturer, including third party manufacturers, establish and implement a quality system by which the manufacturer monitors the manufacturing process and maintains records that show compliance with FDA regulations and the manufacturer’s written specifications and procedures. Among other things, the QSR requires that manufacturers establish performance requirements before production and follow stringent requirements applicable to the device design, testing, production, control, record keeping, documentation, labeling and installation, as well as supplier/contractor selection, complaint handling and other quality assurance procedures during all aspects of the manufacturing process. Compliance with the QSR is necessary to be able to continue to market medical devices that have received FDA approval or clearance, and to receive FDA clearance or approval to market new or significantly modified medical devices. The FDA makes announced and unannounced inspections of medical device manufacturers, and these inspections may include the manufacturing facilities of subcontractors. Following an inspection, the FDA may issue reports, known as FDA Form 483 reports, listing the investigator’s observations of conditions or practices which indicate the possibility that an FDA-regulated product may be in violation of FDA’s requirements. FDA may also issue warning letters documenting regulatory violations observed during an inspection. The manufacturer’s failure to adequately respond to such reports or warning letters may result in FDA enforcement action against the manufacturer and related consequences, including, among other things, fines, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, FDA refusal to grant 510(k) clearance or PMA approval to new devices, withdrawal of existing clearances or approvals, and criminal prosecution.

Manufacturers must also comply with post-market surveillance regulations, including medical device reporting regulations, which require that manufacturers review and report to the FDA any incident in which 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 it were to recur. In addition, corrections and removal reporting regulations require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act that may present a risk to health. The FDA may also order a mandatory recall if there is a reasonable probability that the device would cause serious adverse health consequences or death.

 

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The FDA and the Federal Trade Commission, or FTC, also regulate the promotion and advertising of MRIdian. In general, we may not promote or advertise MRIdian for uses not within the scope of our clearances or approvals or make unsupported safety and effectiveness claims.

Failure to comply with applicable FDA requirements, including delays in or failures to report incidents to the FDA or off-label promotion, can result in enforcement action by the FDA, which can include any of the following sanctions:

 

  n   warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;

 

  n   customer notifications or repair, replacement, refunds, recall, administrative detention or seizure of our MRIdian systems;

 

  n   operating restrictions or partial suspension or total shutdown of production;

 

  n   refusing or delaying requests for 510(k) clearance or PMA approval of new or modified products;

 

  n   withdrawing 510(k) clearances or PMA approvals that have already been granted;

 

  n   refusal to grant export approval for products; or

 

  n   criminal prosecution.

Radiological health. We are also regulated by the FDA under the Electronic Product Radiation Control provisions of the FDCA because MRIdian contains gamma radiation producing components, and because we assemble these components during manufacturing and service activities. The Electronic Product Radiation Control provisions require gamma radiation producing products to comply with certain regulations and applicable performance standards. Manufacturers are required to certify in product labeling and reports to the FDA that their products comply with all necessary standards as well as maintain manufacturing, testing and sales records for their products. The Electronic Product Radiation Control provisions also require manufacturers to report product defects and affix appropriate labeling to covered products. Failure to comply with these requirements could result in enforcement action by the FDA, which can include any of the sanctions described above.

Nuclear Regulatory Commission and U.S. State Agencies

In the United States, as a manufacturer of medical devices and devices utilizing radioactive byproduct material (i.e. depleted uranium shielding and Cobalt-60 sources) we are subject to extensive regulation by not only federal governmental authorities, such as the NRC, but also by state and local governmental authorities, such as the Ohio Department of Health, to ensure such devices are safe and effective. In Ohio, the Department of Health, by agreement with the NRC, regulates the possession, use, and disposal of radioactive byproduct material as well as the manufacture of devices containing radioactive sealed sources to ensure compliance with state and federal laws and regulations. We have received sealed source device approval from the Ohio Department of Health for MRIdian and have entered into a standby letter of credit with PNC for $103 thousand to provide certification of financial assurance for decommissioning Cobalt-60 radioactive materials in accordance with Ohio Department of Health regulations. The company and/or its supplier of radiation sources must also comply with NRC and U.S. Department of Transportation regulations on the labeling and packaging requirements for shipment of radiation sources to hospitals or other users of MRIdian. Compliance with NRC, state and local requirements is required for distribution, installation, use and service within each state that we intend to install MRIdian systems.

Existing radiation therapy facilities practicing nuclear medicine, brachytherapy or Gamma Knife therapy are already required to have necessary NRC and/or state licenses and a radiation safety program requiring compliance to various provisions under 10 CFR 35 “Medical uses of byproduct material.” Use of MRIdian is regulated under 10 CFR 35.1000 “Other medical uses of byproduct

 

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material or radiation from byproduct material.” In 2013, the NRC released a licensing guidance under 10 CFR 35.1000 to guide our customers in the NRC requirements applicable for the use of MRIdian. We believe that this guidance is favorable in that it is consistent with clinical use of existing image-guided radiation therapy devices.

Moreover, our use, management, and disposal of certain radioactive substances and wastes are subject to regulation by several federal and state agencies depending on the nature of the substance or waste material. We believe that we are in compliance with all federal and state regulations for this purpose.

Outside the United States, various laws apply to the import, distribution, installation and use of MRIdian, in consideration of the nuclear materials within MRIdian.

U.S. Privacy and Security Laws

We may also be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. The federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology and Clinical Health Act, or HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually identifiable health information. Further, “business associates,” defined as independent contractors or agents of covered entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity are also subject to certain HIPAA privacy and security standards. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

U.S. Fraud and Abuse Laws and Regulations

The healthcare industry is also subject to a number of fraud and abuse laws and regulations, including physician anti-kickback, false claims and physician payment transparency laws. Violations of these laws can lead to civil and criminal penalties, including exclusion from participation in federal healthcare programs and significant monetary penalties, among others. These laws, among other things, constrain the sales, marketing and other promotional activities of manufacturers of medical products, such as us, by limiting the kinds of financial arrangements we may have with hospitals, physicians and other potential purchasers of medical products who may seek reimbursement from a federal or state health care program such as Medicare or Medicaid.

Anti-kickback laws. The federal Anti-Kickback Statute makes it a criminal offense to knowingly and willfully solicit, offer, receive or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase, order, lease of any good, facility, item or service, that are reimbursable by a state or federal health care program, such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value. The Anti-Kickback Statute has been interpreted to apply to the purchase of medical devices from a particular manufacturer or the referral of patients to a particular supplier of diagnostic services utilizing such devices. Although, there are established statutory exceptions and regulatory safe harbors that define certain financial transactions and practices that are not subject to the Anti-Kickback Statute, the exceptions and safe harbors are drawn narrowly. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances.

 

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Generally, courts have taken a broad interpretation of the scope of the Anti-Kickback Statute, holding that the statute may be violated if merely one purpose of a payment arrangement is to induce referrals or purchases. Further, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Violations of this law are punishable by up to five years in prison, and can also result in criminal fines, administrative civil money penalties and exclusion from participation in federal healthcare programs. In addition, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. Many states have also adopted statutes similar to the federal Anti-Kickback Statute, some of which apply to payments in connection with the referral of patients for healthcare items or services reimbursed by any source, not only governmental payor programs.

False Claims Act. The federal civil False Claims Act prohibits anyone from knowingly and willfully presenting, or causing to be presented, claims for payment, that are false or fraudulent, for services not provided as claimed. In addition to actions initiated by the government itself, the statute authorizes actions to be brought on behalf of the federal government by a private party having knowledge of the alleged fraud. Because the complaint is initially filed under seal, the action may be pending for some time before the defendant is even aware of the action. If the government is ultimately successful in obtaining redress in the matter or if the plaintiff succeeds in obtaining redress without the government’s involvement, then the plaintiff will receive a percentage of the recovery. When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties ranging from $5,500 to $11,000 for each separate false claim, and may be excluded from participation in federal health care programs, and, although the federal False Claims Act is a civil statute, violations may also implicate various federal criminal statutes. Several states have also adopted comparable state false claims act, some of which apply to all payors.

Civil monetary penalties laws. The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

Other fraud and abuse laws. HIPAA also created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and 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. Like the federal Anti-Kickback Statute, the intent standard for certain healthcare fraud statutes under HIPAA was amended by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Affordable Care Act, such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

Physician payment transparency laws. There has been a recent trend of increased federal and state regulation of payments made to physicians and other healthcare providers and entities. The Affordable Care Act, among other things, imposed new reporting requirements on certain manufacturers, including certain device manufacturers, for payments provided to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Failure to submit timely, accurately, and completely the required information may result in civil monetary penalties of up to an aggregate of $150,000 per year and up to an aggregate of $1 million per year for “knowing failures.” Device manufacturers were required to begin

 

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collecting data on August 1, 2013 and submit reports on aggregate payment data to the government for the first reporting period (August 1, 2013 – December 31, 2013) by March 31, 2014, and to report detailed payment data for the first reporting period and submit legal attestation to the accuracy of such data by June 30, 2014. Thereafter, device manufacturers must submit reports by the 90th day of each subsequent calendar year. CMS made all reported data publicly available on September 30, 2014. Certain states also mandate implementation of compliance programs, impose restrictions on device manufacturer marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to healthcare providers and entities.

The laws and regulations and their enforcement are constantly undergoing change, and we cannot predict what effect, if any, changes may have on our business. In addition, new laws and regulations may be adopted which adversely affect our business. There has been a trend in recent years, both in the United States and internationally, toward more stringent regulation and enforcement of requirements applicable to medical device manufacturers and requirements regarding protection and confidentiality of personal data.

State Certificate of Need Laws

In some states, a certificate of need, or CON, or similar regulatory approval is required by hospitals and other healthcare providers prior to the acquisition of high-cost capital items, including MRIdian, 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. CON requirements may preclude our customers from acquiring, or significantly delay acquisition of, MRIdian and/or from performing treatments using MRIdian. CON laws are the subject of ongoing legislative activity, and a significant increase in the number of states regulating the acquisition and use of MRIdian through CON or similar requirements could adversely affect us.

Healthcare Reform

In the United States and foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system seeking, among other things, to reduce healthcare costs that could affect our results of operations.

By way of example, in the United States, the Affordable Care Act was signed into law in March 2010, which is expected to substantially change the way healthcare is delivered and financed by both governmental and private insurers. Among other things, the Affordable Care Act:

 

  n   imposed an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States;

 

  n   established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical effectiveness research in an effort to coordinate and develop such research;

 

  n   implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models; and

 

  n   created an independent payment advisory board that will submit recommendations to reduce Medicare spending if projected Medicare spending exceeds a specified growth rate.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the President signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This included reductions to Medicare payments

 

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to providers of 2% per fiscal year, which went into effect on April 1, 2013 and will stay in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals and imaging centers.

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for MRIdian or additional pricing pressure.

Foreign Regulation of Medical Devices

Our activities outside the United States are subject to regulatory requirements that vary from country to country and frequently differ significantly from those in the United States. Failure to obtain and maintain regulatory approval or clearance in any foreign country in which we market or plan to market MRIdian may have a negative effect on our ability to generate revenue and harm our business.

In general, MRIdian is regulated outside the United States as medical devices by foreign governmental agencies similar to the FDA and the FTC. In addition, in foreign countries where we have operations or sell MRIdian, we are subject to laws and regulations applicable to manufacturers of medical devices, radiation producing devices and to the healthcare industry, and laws and regulation of general applicability relating to environmental protection, safe working conditions, manufacturing practices and other matters. These laws and regulations are often comparable to, or more stringent than U.S. laws and regulations. Our sales of MRIdian in foreign countries are also subject to regulation of matters such as product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. We rely in some countries on our foreign distributors to assist us in complying with applicable regulatory requirements.

Regulation in the EU

In the European Union, or EU, we are required under the European Medical Device Directive (Council Directive 93/42/EEC) to affix the CE mark to our MRIdian systems in order to sell the MRIdian systems in member countries of the EU. The CE mark is an international symbol that represents adherence to certain essential principles of safety and effectiveness mandated in the European Medical Device Directive (the so-called “essential requirements”). Once affixed, the CE mark enables a product to be sold within the European Economic Area, which is composed of the 28 Member States of the EU plus Norway, Iceland and Liechtenstein.

To demonstrate compliance with the essential requirements, we must undergo a conformity assessment procedure which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile) where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements of the Medical Devices Directive, a conformity assessment procedure requires the intervention of an organization accredited by a Member State of the EEA to conduct conformity assessments, or a Notified Body. Depending on the relevant conformity assessment procedure, the Notified Body would typically audit and examine the technical file and the quality system for the manufacture, design and final inspection of our devices. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the essential requirements. This Certificate entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity.

We received the CE Certificate of Conformity from our Notified Body in November 2014, allowing us to affix the CE mark to MRIdian in order to sell it throughout the EEA.

If we modify MRIdian we may need to apply for permission to affix the CE mark to the modified product. Additionally, we will need to apply for a CE mark for any new products that we may develop in

 

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the future. We cannot be certain that we will be able to obtain permission to affix the CE mark for modified or new products or that we will continue to meet the quality and safety standards required to maintain the permissions that we have already received or may receive in the future. In addition, if we are unable to obtain permission to affix the CE mark to our future products, we would be unable to sell them in EU member countries.

Regulation in Other Countries

We will be subject to additional regulations in foreign countries in which we intend to market, sell and import MRIdian. We or our distributors must receive all necessary approvals or clearance prior to marketing and importing MRIdian in those international markets. We received a license and permission to import MRIdian into the United Arab Emirates in December 2014. We received regulatory approval in Italy in January 2015, which is required in addition to the CE mark. We are currently seeking government approval to market MRIdian in China, Japan, Taiwan, Korea, Russia, Hong Kong and Turkey. Other countries where we will be seeking approval in the near term are Canada, Egypt, and Australia. We will seek approvals in other countries as may be required in the future.

The International Standards Organization promulgates internationally recognized standards, including those for the requirements of quality systems. We are certified to the ISO 13485:2003 standard, which specify the quality system requirements for medical device manufacturers. To support our ISO certifications, we are subject to surveillance audits by a Notified Body yearly and recertification audits every three years that assess our continued compliance with the relevant ISO standards. Our next recertification audit will occur by March 2015.

Employees

At October 31, 2014, we had 70 full-time employees. Within our workforce, 27 employees are engaged in research and development and 43 in business development, finance, human resources, facilities, information technology and general management and administration. We have no collective bargaining agreements with our employees, and we have not experienced any work stoppages. We consider our relations with our employees to be good.

Facilities

Our corporate headquarters are located in Oakwood Village, Ohio, where we lease and occupy approximately 41,000 square feet of office space. The current term of our Oakwood Village lease expires on October 31, 2017, with an option to extend the term through October 31, 2027. We also maintain an office in Mountain View, California, where we lease and occupy approximately 25,500 square feet of office space. The current term of our Mountain View lease expires on November 30, 2019. In connection with our Mountain View, California lease, we have entered into a standby letter of credit with PNC Bank, National Association for $0.5 million.

We believe that our existing facilities are adequate for our current needs. When our leases expire, we may exercise our renewal option or look for additional or alternate space for our operations and we believe that suitable additional or alternative space will be available in the future on commercially reasonable terms.

Legal Proceedings

From time to time, we are subject to various legal proceedings, claims and administrative proceedings that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, as of the date of this prospectus, we do not believe we are party to any claim, proceeding or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information regarding our executive officers and directors at December 31, 2014:

 

Name

      Age      

Position(s)

Executive Officers

   

Chris A. Raanes

  49   President, Chief Executive Officer and Director

James F. Dempsey, Ph.D.

  44   Chief Scientific Officer and Director

Michael Brandt

  51   Senior Vice President of Sales

D. David Chandler

  57   Chief Financial Officer

Non-Employee Directors

   

Joshua Bilenker, M.D.

  43   Director

David Bonita, M.D.

  39   Director

Caley Castelein, M.D.

  44   Director

Mark S. Gold, M.D.

  65   Director

Peter Roemer, Ph.D.

  59   Director

Robert Weisskoff, Ph.D.

  52   Director

Philip Yang

  57   Director

 

(1) Member of audit committee.
(2) Member of compensation committee.
(3) Member of nominating and corporate governance committee.

Executive Officers

Chris A. Raanes has served as our President and Chief Executive Officer and as a member of the board of directors since February 2013. Mr. Raanes brings over 15 years of experience in the private and public medical device field. As our President and Chief Executive Officer, Mr. Raanes has supported our growth and strategic initiatives, including our worldwide commercial expansion of MRIdian. Previously, Mr. Raanes was Executive Vice President from July 2011 to November 2012 and Chief Operating Officer and Senior Vice President from September 2002 to July 2011 at Accuray Incorporated, a medical device company. He also served as Vice President and General Manager, Digital Imaging at PerkinElmer Inc., a healthcare company, from December 1999 to March 2002. Mr. Raanes holds a B.S. and an M.S. in Electrical Engineering from the Massachusetts Institute of Technology. We believe Mr. Raanes is qualified to serve on our board of directors because of his extensive management experience and his expertise in radiation therapy device commercialization and operations.

James F. Dempsey, Ph.D. has served as our Chief Scientific Officer since founding ViewRay in March 2004. Dr. Dempsey has been a member of the board of directors since January 2008. Dr. Dempsey brings more than 17 years of experience in the field of radiotherapy medical physics to ViewRay. He previously served as a faculty member in the University of Florida Department of Radiation Oncology, as Assistant Professor from July 2001 to July 2007 and Associate Professor from July 2007 to January 2008. Dr. Dempsey holds a B.S. in Radiochemistry from San Jose State University and a Ph.D. in Nuclear Chemistry from Washington University in St. Louis. We believe Dr. Dempsey is qualified to serve on our board of directors based on his in-depth knowledge of our product, business and industry, as well as his expertise in nuclear chemistry and physics and medical physics.

Michael Brandt has served as our Senior Vice President of Sales since January 2012. He previously served as a general manager of Accuray Incorporated’s Americas division from October

 

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2009 to December 2012, and as general manager of Accuray Incorporated’s Europe, Middle East, India and Africa division from September 2008 to October 2009. Prior to Accuray Incorporated, Mr. Brandt worked at Philips Medical Systems, a healthcare company, serving as Senior Director MRI International from September 2007 to September 2008, as Senior Director MRI, North America from 2005 to September 2007 and as Marketing Director MRI, North America from 2001 to 2005. Mr. Brandt holds an N.D. in Electrical Engineering from Vaal University of Technology in South Africa.

D. David Chandler has served as our Chief Financial Officer since November 2010. Mr. Chandler has over 30 years of experience in finance, strategic planning, investor relations and accounting. Before joining ViewRay, Mr. Chandler served as a Practice Manager and consulting Chief Financial Officer with vcfo Holdings, Inc., a financial consulting firm, from October 2007 to November 2010. Prior to that, he served as Chief Operating Officer and Chief Financial Officer of Straitshot Communications, Inc., a network solutions company, from June 2003 to July 2007 and Chief Financial Officer of Stellar One Corporation, a technology company, from July 1998 to April 2003. Prior to Stellar One Corporation, Mr. Chandler held a variety of financing and accounting management roles, including Business Assurance Manager with PricewaterhouseCoopers LLP. Mr. Chandler received a B.A. in Business from the University of Washington, Michael G. Foster School of Business and a B.A. in German from the University of Washington.

Board Composition

Non-Employee Directors

Joshua Bilenker, M.D. has served as a member of our board of directors since January 2008. Dr. Bilenker joined Aisling Capital LLC in April 2006 and has served as an Operating Partner since November 2013. He has served as Chief Executive Officer of Loxo Oncology, Inc., an Aisling Capital LLC portfolio company, since July 2013. Previously, Dr. Bilenker served as a Medical Officer in the Office of Oncology Drug Products at the FDA from August 2004 to April 2006. Dr. Bilenker has served on the boards of directors of Loxo Oncology, Inc. since July 2008, T2 Biosystems, Inc. since August 2011 and Roka Bioscience, Inc. since January 2012, as well as on the boards of directors of several private companies. He is also a board member of the NCCN Foundation and BioEnterprise. Dr. Bilenker holds an A.B. in English from Princeton University and an M.D. from the Johns Hopkins School of Medicine. We believe Dr. Bilenker is qualified to serve on our board of directors based on his oncology background, experience at the FDA and his extensive service as a director or officer of, and as an investor in, other healthcare companies.

David Bonita, M.D. has served as a member of our board of directors since January 2008. Dr. Bonita has served as a Private Equity Partner at OrbiMed Advisors LLC, or OrbiMed, since June 2013. Dr. Bonita joined OrbiMed in June 2004 as a Private Equity Senior Associate, and was promoted to Private Equity Principal in December 2007. Prior to OrbiMed, he was a corporate finance analyst in the healthcare investment banking group of Morgan Stanley & Co. from February 1998 to July 1999, and a corporate finance analyst in the healthcare investment banking group of UBS AG from August 1997 to February 1998. Dr. Bonita has also served on the board of directors of Loxo Oncology, Inc. since October 2013, as well as on the boards of directors of several private companies. Dr. Bonita holds an A.B. in Biological Sciences from Harvard College and an M.D. and M.B.A. from Columbia University in the City of New York. We believe Dr. Bonita is qualified to serve on our board of directors due to his extensive investment experience in the healthcare industry.

Caley Castelein, M.D. has served as a member of our board of directors since January 2008. Dr. Castelein has served as a Managing Director of Kearny Venture Partners, L.P. since September 2006. Prior to that, Dr. Castelein served as a Managing Director at Thomas Weisel Partners, which was acquired by Stifel, Nicolaus & Company, Incorporated in July 2010, from March 2003 to September 2006. Dr. Castelein has served on the boards of directors of several private companies.

 

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Dr. Castelein holds an A.B. in Biological Sciences from Harvard College and an M.D. from the University of California, San Francisco. We believe Dr. Castelein is qualified to serve on our board of directors based on his extensive investment experience in the healthcare industry.

Mark S. Gold, M.D. has served as a member of our board of directors since our founding in March 2004. Dr. Gold was a Professor, Distinguished Professor and Chairman of Psychiatry at the University of Florida from 1990 until his retirement in June 2014. Dr. Gold has worked for over 40 years in basic science and clinical research, translating research into clinical practice. He has been a consultant and senior advisor to banks and private equity and venture capital firms on medical devices, pharmaceuticals and health care services throughout his career. He was a Founding Director of the Somerset Valley Bank and Somerset Valley Financial from 1991 to 1999. Dr. Gold has served on the board of directors of Axogen, Inc. (formerly LecTec Corporation) since September 2011. Dr. Gold is currently the Chairman of RiverMend Health. We believe Dr. Gold is qualified to serve on our board of directors because of his academic expertise and his extensive research experience across medical specialties and institutions.

Peter Roemer, Ph.D. has served as a member of our board of directors since March 2008. Dr. Roemer has served as Chief Engineer of GE Healthcare, MRI, a division of General Electric Company, since June 2013. Dr. Roemer was previously Chief Technology Officer of GE Healthcare, MRI from November 2009 to June 2013. Dr. Roemer was the co-founder of ONI Medical Systems, Inc., or ONI, in November 1997 and served as its Chief Operating Officer and Chief Technology Officer from November 1997 until the sale of ONI’s business and assets to the GE Healthcare division of General Electric Company in November 2009. Prior to ONI, Dr. Roemer served as Engineering Vice President of Advanced NMR Systems Inc. from June 1994 to November 1997. Dr. Roemer holds a B.S. in Electrical Engineering and a Ph.D. in Nuclear Engineering from the Massachusetts Institute of Technology. We believe Dr. Roemer is qualified to serve on our board of directors due to his extensive medical imaging research and development experience, scientific expertise and service as a founder and officer of other life sciences companies.

Robert Weisskoff, Ph.D. has served as a member of our board of directors since January 2008. Dr. Weisskoff has served as a Partner of Fidelity Biosciences, a division of FMR LLC, since November 2004. Prior to joining FMR LLC, he was Vice President of Business Development at EPIX Pharmaceuticals, Inc. from 1998 to October 2004. He previously served on the staff of Massachusetts General Hospital/Harvard Medical School as a Director and Associate Professor of Radiology from 1990 to 1998. From July 2007 to March 2013, Dr. Weisskoff served on the board of directors of Tetraphase Pharmaceuticals, Inc., and currently serves on the boards of directors of several private companies. Dr. Weisskoff holds an A.B. in Physics from Harvard University, a Ph.D. in Physics from the Massachusetts Institute of Technology and an M.B.A. from Columbia University in the City of New York. We believe Dr. Weisskoff is qualified to serve on our board of directors because of his investment experience in the healthcare industry and his extensive research and development and business development experience at medical device companies.

Philip Yang has served as a member of our board of directors since April 2014. Mr. Yang has served as Vice President at Cowealth Medical Holding Co. Ltd., or Cowealth, since July 1997. Prior to Cowealth, Mr. Yang served as Vice President, Administration at Inwood Industry Co., Ltd. from April 1994 until July 1997. He previously served on the board of directors of Cowealth from June 2011 until June 2014. Mr. Yang holds a B.S. in Industrial Management from National Cheng Kung University in Taiwan. We believe Mr. Yang is qualified to serve on our board of directors because of his extensive management experience with international medical device companies.

 

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Director Independence

Our board of directors currently consists of nine members. Our board of directors has determined that all of our directors, other than Mr. Raanes and Dr. Dempsey, qualify as “independent” directors in accordance with listing requirements of The NASDAQ Stock Market, or NASDAQ. Mr. Raanes and Dr. Dempsey are not considered independent because each is an employee of ViewRay. The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, as required by NASDAQ rules, our board of directors has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships among any of our directors or executive officers.

Classified Board of Directors

In accordance with our amended and restated certificate of incorporation to be in effect immediately prior to the consummation of this offering, our board of directors will be divided into three classes with staggered, three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Effective upon the consummation of this offering, our directors will be divided among the three classes as follows:

 

  n   the Class I directors will be             ,             and             , and their terms will expire at the annual meeting of stockholders to be held in 2016;

 

  n   the Class II directors will be             ,             and             , and their terms will expire at the annual meeting of stockholders to be held in 2017; and

 

  n   the Class III directors will be             ,             and             , and their terms will expire at the annual meeting of stockholders to be held in 2018.

Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control of the company.

Role of Board in Risk Oversight Process

Risk assessment and oversight are an integral part of our governance and management processes. Our board of directors encourages management to promote a culture that incorporates risk management into our corporate strategy and day-to-day business operations. Management discusses strategic and operational risks at regular management meetings and conducts specific strategic planning and review sessions during the year that include a focused discussion and analysis of the risks facing us. Throughout the year, senior management reviews these risks with the board of directors at regular board meetings as part of management presentations that focus on particular business functions, operations or strategies, and presents the steps taken by management to mitigate or eliminate such risks.

 

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Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through our board of directors as a whole, as well as through various standing committees of our board of directors that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure, and our audit committee is responsible for overseeing our major financial risk exposures and the steps our management has taken to monitor and control these exposures. The audit committee also monitors compliance with legal and regulatory requirements. Our nominating and governance committee monitors the effectiveness of our corporate governance guidelines and considers and approves or disapproves any related-person transactions. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

Board Committees

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting process. Among other matters, the audit committee:

 

  n   appoints our independent registered public accounting firm;

 

  n   evaluates our independent registered public accounting firm’s qualifications, independence and performance;

 

  n   determines the engagement of our independent registered public accounting firm;

 

  n   reviews and approves the scope of the annual audit and the audit fee;

 

  n   discusses with management and our independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements;

 

  n   approves the retention of our independent registered public accounting firm to perform any proposed permissible non-audit services;

 

  n   monitors the rotation of partners of our independent registered public accounting firm on our engagement team as required by law;

 

  n   is responsible for reviewing our financial statements and our management’s discussion and analysis of financial condition and results of operations to be included in our annual and quarterly reports to be filed with the SEC;

 

  n   reviews our critical accounting policies and estimates; and

 

  n   annually reviews the audit committee charter and the committee’s performance.

The current members of our audit committee are             ,             and             .             serves as the chairperson of the audit committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and NASDAQ. Our board of directors has determined that             is an audit committee financial expert as defined under the applicable rules of the SEC and has the requisite financial sophistication as defined under the applicable rules and regulations of NASDAQ. Under the rules of the SEC, members of the audit committee must also meet heightened independence standards. However, a minority of the members of the audit committee may be exempt from the heightened audit committee independence standards for one year from the date of effectiveness of the registration statement of which this prospectus is a part. Our board of directors has determined that each of             and             are independent under the applicable rules of NASDAQ. The audit committee operates under a written charter that satisfies the applicable standards of the SEC and NASDAQ.

 

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Compensation Committee

Our compensation committee reviews and recommends policies relating to compensation and benefits of our officers and employees. The compensation committee reviews and recommends corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives and recommends to our board of directors the compensation of these officers based on such evaluations. The compensation committee also recommends to our board of directors the issuance of stock options and other awards under our stock plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance by the compensation committee with its charter. The current members of our compensation committee are             ,              and             .              serves as the chairperson of the compensation committee. Each of the members of our compensation committee is independent under the applicable rules and regulations of NASDAQ, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and is an “outside director” as that term is defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, or the Code. The compensation committee operates under a written charter.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and reporting and making recommendations to our board of directors concerning governance matters. The current members of our nominating and corporate governance committee are             ,             and             .             serves as the chairperson of the nominating and corporate governance committee. Each of the members of our nominating and corporate governance committee is an independent director under the applicable rules and regulations of NASDAQ relating to nominating and corporate governance committee independence. The nominating and corporate governance committee operates under a written charter.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our board of directors or compensation committee.

Board Diversity

Upon consummation of this offering, our nominating and corporate governance committee will be responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing) such candidates, will take into account many factors, including the following:

 

  n   personal and professional integrity;

 

  n   ethics and values;

 

  n   experience in corporate management, such as serving as an officer or former officer of a publicly held company;

 

  n   experience in the industries in which we compete;

 

  n   experience as a director or executive officer of another publicly held company;

 

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  n   diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;

 

  n   conflicts of interest; and

 

  n   practical and mature business judgment.

Currently, our board of directors evaluates, and following the consummation of this offering will evaluate, each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

Code of Business Conduct and Ethics

We have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Upon the consummation of this offering, the code of business conduct and ethics will be available on our website at www.viewray.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website. The reference to our web address does not constitute incorporation by reference of the information contained at or available through our website.

Limitation on Liability and Indemnification Matters

Our amended and restated certificate of incorporation, which will become effective immediately prior to the consummation of this offering, contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for:

 

  n   any breach of the director’s duty of loyalty to us or our stockholders;

 

  n   any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  n   unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

 

  n   any transaction from which the director derived an improper personal benefit.

Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective immediately prior to the consummation of this offering, provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Our amended and restated bylaws also provide that we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his, her or its actions in that capacity regardless of whether we would otherwise be permitted to indemnify him, her or it under Delaware law.

In addition to the indemnification required in our amended and restated certificate of incorporation and amended and restated bylaws, we have entered or intend to enter into indemnification agreements with each of our directors, officers and certain other employees prior to the consummation of this offering. These agreements will provide for the indemnification of our directors, officers and certain other employees for all reasonable expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were our agents. We believe that these provisions in our amended and restated certificate of incorporation, amended and restated bylaws and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. This description of the limitation of liability and indemnification provisions of our

 

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amended and restated certificate of incorporation, of our amended and restated bylaws and of our indemnification agreements is qualified in its entirety by reference to these documents, each of which is attached as an exhibit to the registration statement of which this prospectus is a part.

The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. There is no pending litigation or proceeding naming any of our directors, officers or employees as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director, officer or employee.

Director Compensation

In 2014, we paid Dr. Gold, who is not affiliated with any of our major investors, an aggregate in cash of $14,000, which represents a quarterly retainer of $2,000 plus $2,000 per board meeting attended. Otherwise, we did not pay any cash compensation to any of the non-employee members of our board of directors, and we did not pay director fees to our directors who are our employees. However, we reimbursed our non-employee directors for travel and other necessary business expenses incurred in the performance of their services for us.

In addition, in April 2014, we granted each of Drs. Gold and Roemer options to purchase 9,028 and 2,519 shares of our common stock, with exercise prices of $0.31 per share, which the board determined was the fair market value on the date of grant, and with vesting commencement dates of May 13, 2013 and November 13, 2013, respectively. These options vest and become exercisable in 48 monthly installments on each monthly anniversary of the applicable vesting commencement date, such that all awards will be vested on the four-year anniversary of the vesting commencement date, subject to the individual continuing to provide services to us through each such vesting date.

In connection with this offering, we intend to approve and implement a compensation program for our non-employee directors that will consist of annual retainer fees and initial and annual long-term equity awards.

2014 Director Compensation Table

The following table sets forth information for the year ended December 31, 2014 regarding the compensation awarded to, earned by or paid to our non-employee directors:

 

Name(1)

  Fees Earned
or Paid in
Cash($)
    Option
Awards

($)(2)
     Total($)  

Joshua Bilenker, M.D.

                     

David Bonita, M.D.

                     

Caley Castelein, M.D.

                     

Mark S. Gold, M.D.

    14,000        2,079         16,079   

Peter Roemer, Ph.D.

                     

Robert Weisskoff, Ph.D.

                     

Philip Yang

                     

 

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(1) Mr. Raanes, our President and Chief Executive Officer, and Dr. Dempsey, our Chief Scientific Officer, receive no compensation for their service as directors, and, consequently, neither is included in this table. The compensation received by each of Mr. Raanes and Dr. Dempsey as an employee during 2014 is presented in the 2014 Summary Compensation Table in the section titled “Executive Compensation.”
(2) The amounts reported in the Option Awards column represent the grant date fair values of stock options granted during 2014 as calculated in accordance with ASC Topic 718. See Note 12 to our audited financial statements included elsewhere in this prospectus for the assumptions used in calculating these amounts. At December 31, 2014, each of Drs. Gold and Roemer held options to purchase an aggregate of 48,907 shares of common stock. None of our other non-employee directors held any options or stock awards.

 

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EXECUTIVE COMPENSATION

The following is a discussion and analysis of compensation arrangements of our named executive officers, or NEOs. This discussion contains forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt may differ materially from currently planned programs as summarized in this discussion. As an “emerging growth company,” as defined in the JOBS Act, we are not required to include a Compensation Discussion and Analysis section and have elected to comply with the scaled disclosure requirements applicable to emerging growth companies.

We seek to ensure that the total compensation paid to our executive officers is reasonable and competitive. Compensation of our executive officers is structured around the achievement of individual performance and near-team corporate targets, as well as long-term business objectives.

Our NEOs for 2014 were as follows:

 

  n   Chris A. Raanes, President and Chief Executive Officer;

 

  n   James F. Dempsey, Ph.D., Chief Scientific Officer; and

 

  n   Michael Brandt, Senior Vice President of Sales.

2014 Summary Compensation Table

The following table shows information regarding the compensation of our NEOs for services performed in the year ended December 31, 2014.

 

Name and Principal Position

  Year     Salary($)     Bonus($)(1)     Option
Awards
($)(2)
    Non-Equity
Incentive
Plan
Compensation
($)(3)
    All Other
Compensation
($)(4)
    Total($)  

Chris A. Raanes

   
2014
  
   
415,000
  
   

  
   
236,368
  
   
155,625
  
   
19,731
  
   
826,724
  

President and Chief Executive Officer

    2013        378,845        50,000        696,026        144,139        35,140        1,304,150   
             

James F. Dempsey, Ph.D.

   
2014
  
   
260,000
  
   

  
   
44,999
  
   
68,250
  
   

  
   
373,249
  

Chief Scientific Officer

    2013        260,000                      69,706               329,706   
             

Michael Brandt

   
2014
  
   
250,000
  
   

  
   
14,222
  
   
106,625
  
   

  
   
370,847
  

Senior Vice President of Sales

    2013        250,000                      101,192               351,192   

 

(1) The amount reported in the Bonus column represents the signing bonus paid to Mr. Raanes in 2013 pursuant to the Raanes Agreement (as defined below), whereby we paid Mr. Raanes $25,000 on the commencement of his employment and another $25,000 on the six-month anniversary of the commencement of his employment. For more information, please see the description of the Raanes Agreement in “Narrative to 2014 Summary Compensation Table and Outstanding Equity Awards at 2014 Year End—Terms and Conditions of Employment Agreement with Chris A. Raanes” below.
(2) The amounts reported in the Option Awards columns represent the grant date fair values of stock options granted during 2014 and 2013 as calculated in accordance with ASC Topic 718. See Note 12 to our audited financial statements included elsewhere in this prospectus for the assumptions used in calculating these amounts.
(3)

The amounts reported in the Non-Equity Incentive Plan Compensation column represent the annual cash performance-based bonuses earned by our NEOs pursuant to the achievement of certain company performance objectives. These amounts for 2014 were paid to the NEOs in early 2015. For Mr. Brandt,

 

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  the amount also includes $41,000 for 2014 and $34,107 for 2013 that was payable pursuant to achievement of certain sales commissions under our sales compensation plan. For more information on the 2014 bonuses paid to our NEOs, please see the descriptions of the annual performance bonuses paid to our NEOs in “Narrative to 2014 Summary Compensation Table and Outstanding Equity Awards at 2014 Year End—Terms and Conditions of Annual Bonuses” below and the description of the sales commissions paid to Mr. Brandt in “Narrative to 2014 Summary Compensation Table and Outstanding Equity Awards at 2014 Year End—Terms and Conditions of Sales Compensation Plan” below.
(4) The amounts reported in the All Other Compensation column in 2014 for Mr. Raanes represents commercial air travel of $11,367, and transportation and housing in the greater Cleveland area of $8,364 reimbursed by us pursuant to the terms and conditions of the Raanes Agreement, whereby we reimburse the costs incurred by Mr. Raanes for commuting from his residence to our offices in Oakwood Village, Ohio. For more information, please see the description of the Raanes Agreement in “Narrative to 2014 Summary Compensation Table and Outstanding Equity Awards at 2014 Year End—Terms and Conditions of Employment Agreement with Chris A. Raanes” below.

Outstanding Equity Awards at 2014 Year End

The following table sets forth all outstanding equity awards held by each of the NEOs at December 31, 2014.

 

    Vesting
Commencement

Date(1)
    Option Awards  
      Number of
Securities
Underlying
Unexercised
Options
(#)
     Number of
Securities
Underlying
Unexercised
Options
(#)
     Option
Exercise
Price

($)
     Option
Expiration

Date
 

Name

    Exercisable      Unexercisable        

Chris A. Raanes

   
2/4/2013
(2) 
   
975,043
  
    
1,425,047
  
    
0.29
  
    
2/7/2023
  
    5/13/2013        376,504         574,654         0.31         4/11/2024   
    11/13/2013        98,046         263,954         0.31         4/11/2024   

James F. Dempsey, Ph.D.

    1/8/2008 (2)      183,370                 0.33         6/17/2018   
    9/30/2014 (3)              125,000         0.33         9/30/2018   
    6/17/2010 (4)      150,490                 0.28         6/29/2020   
    7/14/2010        481,637                 0.28         6/29/2020   
    3/1/2012        105,996         48,166         0.29         8/8/2022   
    5/13/2013        92,758         141,556         0.31         4/11/2024   
    11/13/2013        157,196         423,189         0.31         4/11/2024   

Michael Brandt

    1/9/2012 (2)      56,773         58,277         0.28         12/1/2021   
    3/1/2012        27,951         12,693         0.29         8/8/2022   
    5/13/2013        24,453         37,322         0.31         4/11/2024   
    11/13/2013        4,673         12,565         0.31         4/11/2024   

 

(1) Except as otherwise noted, options vest and become exercisable in 48 installments on each monthly anniversary of the vesting commencement date, such that all awards will be vested on the fourth anniversary of the vesting commencement date, subject to the holder continuing to provide services to the company through such vesting date.
(2)

The option vests and becomes exercisable as to 25% of the shares on the first anniversary of the vesting commencement date, and in 36 installments thereafter on each monthly anniversary of the vesting commencement date, such that all awards will be vested on the fourth anniversary of the vesting commencement date, subject to the holder continuing to provide services to the company through such vesting date. For Dr. Dempsey’s option, in the event Dr. Dempsey is terminated without “cause” within 12 months following a “change of control” (each as defined below in the

 

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  section titled “—Offer Letter to James F. Dempsey, Ph.D.”), the vesting and exercisability of the option shall accelerate in full as of the date of such termination. For Mr. Raanes’ option, (i) if Mr. Raanes is terminated without “cause” or resigns for “good reason” (each as defined below in the section titled “—Employment Agreement with Chris A. Raanes”), the vesting and exercisability of the option shall accelerate with respect to the number of shares that would have vested in the 12 months following Mr. Raanes’ termination; and (ii) in the event Mr. Raanes is terminated without cause or resigns for good reason within the period of time commencing three months prior to a “change of control” (as defined below in the section titled “—Employment Agreement with Chris A. Raanes”) and ending 18 months following such change of control, then the vesting and exercisability of the option shall accelerate in full as of the date of such termination.
(3) The option vests and becomes exercisable in full upon the occurrence of one of the following events on or before September 30, 2014: (a) immediately prior to the closing of a “corporate reorganization” (as defined in the company’s contingent equity agreement, effective January 8, 2008) in which the company and/or our stockholders receive at least $500 million; or (b) immediately prior to the closing of a firm commitment underwritten public offering of shares of common stock to the public at a pre-money valuation of at least $500 million. The option did not vest on or before September 30, 2014.
(4) The option vests and becomes exercisable in 36 installments on each monthly anniversary of the vesting commencement date, such that all awards will be vested on the third anniversary of the vesting commencement date, subject to Dr. Dempsey continuing to provide services to the company through such vesting date.

Narrative to 2014 Summary Compensation Table and Outstanding Equity Awards at 2014 Year End

Employment Agreement with Chris A. Raanes

In January 2013, we entered into an employment agreement with Mr. Raanes, or the Raanes Agreement, to serve as our President and Chief Executive Officer and as a member of our board of directors, providing for base salary, target annual bonus opportunity and standard employee benefit plan participation. Mr. Raanes’ base salary is subject to annual increases in the sole discretion of the board of directors. Mr. Raanes’ base salary for 2014 is $415,000, and he had an annual bonus target of 50% of base salary that is earned based on the achievement of certain milestones established by our board of directors. Please see the section below titled “Terms and Conditions of Annual Bonuses” for a further description of our annual bonuses awarded to Mr. Raanes. In 2013, Mr. Raanes was also paid a $50,000 signing bonus, 50% of such signing bonus was paid to Mr. Raanes on the date he commenced employment with us and the remaining 50% of such signing bonus was paid on the six-month anniversary of such date. In addition, we reimburse or directly pay for the costs incurred by Mr. Raanes for housing and transportation in the greater Cleveland area and commercial air travel from his residence in California to our offices in Ohio. In 2014, we reimbursed $8,364 in the aggregate for Mr. Raanes’ housing and transportation in the greater Cleveland area and $11,367 for commercial air travel from his residence to our offices in Ohio. Pursuant to the Raanes Agreement, we granted Mr. Raanes a stock option to purchase 2,400,000 shares of common stock, which equaled 5% of our issued and outstanding shares as of January 18, 2013. Under the Raanes Agreement, Mr. Raanes’ employment is terminable at-will. Mr. Raanes has also executed our standard confidential information and invention assignment agreement, which contains certain non-competition covenants.

The Raanes Agreement also provides Mr. Raanes with certain severance and change in control benefits. Mr. Raanes’ will be eligible to participate in any carveout plan that we adopt, with minimum levels of compensation at various transaction price levels as set forth in the Raanes Agreement. While we have not adopted any such carveout plan (and as a result Mr. Raanes is not currently eligible for any such carveout payments), in the event we do adopt a carveout plan, the following illustrates the minimum percentage of total proceeds that would be received by Mr. Raanes in connection with an acquisition transaction: (i) if the transaction value is equal to or less than $125 million, Mr. Raanes will not receive any carveout payments; (ii) if the transaction value is greater than or equal to $275 million,

 

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Mr. Raanes will receive 5% of the total proceeds; and (iii) between $125 million and $275 million, Mr. Raanes’ percentage of total proceeds will be determined according to a linear point-slope formula which will be interpolated and applied at the closing of such transaction. Mr. Raanes will remain eligible to participate in the carveout plan only if he remains employed within six months prior to a “change of control” (as defined below), unless he is terminated for “cause” (as defined below).

In addition, pursuant to the Raanes Agreement, if Mr. Raanes’ employment is terminated without cause or Mr. Raanes resigns for “good reason” (as defined below) at any time three months prior to or 18 months following a change of control, then the vesting and exercisability of Mr. Raanes’ initial option granted under the Raanes Agreement will accelerate in full.

Additionally, in the event that Mr. Raanes is terminated without cause or resigns for good reason, subject to his executing and not revoking a general release of all claims against us, then Mr. Raanes will become entitled to receive (i) a severance payment equal to 12 months of his annual base salary, payable in substantially equal installments, (ii) a lump sum cash payment equal to a pro-rated portion of his annual performance bonus payable on the later of (a) the annual date bonuses are made to current employees and (b) the first installment payment for the base salary severance, (iii) payment or reimbursement by us of COBRA premiums for up to 12 months, and (iv) accelerated vesting of Mr. Raanes’ option granted under the Raanes Agreement with respect to that number of shares that would have vested had he remained employed with the company for an additional 12 months.

Under the Raanes Agreement, “change of control” means (i) a sale of all or substantially all of the assets of the company and its subsidiaries taken as a whole or (ii) a merger, consolidation or other similar business combination involving the company, if, upon completion of such transaction, the beneficial owners of voting equity securities of the company immediately prior to the transaction beneficially own less than 50% of the successor entity’s voting equity securities; provided that “change of control” will not include a transaction where the consideration received or retained by the holders of the then-outstanding capital stock of the company does not consist primarily of (a) cash or cash equivalent consideration, (b) securities which are registered under the Securities Act or any successor statute thereto, or (c) securities for which the company or any other issuer thereof has agreed, including pursuant to a demand, to file a registration statement within 90 days of completion of the transaction for resale to the public pursuant to the Securities Act.

Under the Raanes Agreement, “cause” means Mr. Raanes’ (i) dishonesty of a material nature; (ii) theft or embezzlement of our funds or assets; (iii) conviction of, or guilty or no contest plea to, a felony charge or misdemeanor involving moral turpitude, or the entry of a consent decree with any governmental body; (iv) noncompliance in any material respect with any laws or regulations, foreign or domestic; (v) violation of any express direction or any rule, regulation or policy established by the board of directors that is consistent with the terms of the Raanes Agreement; (vi) material breach of the Raanes Agreement or material breach of Mr. Raanes’ fiduciary duties to the company; (vii) gross incompetence, gross neglect or gross misconduct in the performance of his duties; or (viii) repeated and consistent failure to perform the duties under the Raanes Agreement during normal business hours except during vacation periods or absences due to temporary illness. If the board of directors determines in good faith that cause exists, Mr. Raanes will be given written notice by the board of directors that provides the factual basis for the determination prior to that determination being final and Mr. Raanes will have 10 business days to respond and to attempt to cure the condition, although no cure period need be offered if the board of directors reasonably determines that the conditions are not subject to cure.

Under the Raanes Agreement, “good reason” means a resignation that occurs within 30 days following Mr. Raanes’ first having knowledge of any (i) material reduction in his base salary, (ii) material breach of the Raanes Agreement by the company, or (iii) material diminution of Mr. Raanes’ title as Chief Executive Officer or responsibility as Chief Executive Officer imposed by the board of directors (other than in response to an event constituting cause). With respect to

 

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subsection (i), any reduction consistent with general reductions in the base salaries of other executives as part of a plan to avoid insolvency or manage any financial distress or hardship of the company will not be deemed to constitute a material reduction in his base salary; and with respect to subsection (ii), good reason will only exist where Mr. Raanes’ has provided the company with written notice of the breach and the company has failed to cure such breach within 10 business days of such written notice.

Offer Letter to James F. Dempsey, Ph.D.

In October 2010, we entered into an offer letter with Dr. Dempsey that provides for employment at-will and annual base salary, annual target bonus, option awards and certain other benefits. Our board of directors reviews Dr. Dempsey’s base salary and target bonus opportunity from time to time to ensure compensation adequately reflects his qualifications, experience, role and responsibilities. Dr. Dempsey’s base salary for 2014 was $260,000. In addition, for 2014, Dr. Dempsey has an annual target bonus of 35% of base salary awarded based on the achievement of certain milestones established by our board of directors. Please see the section titled “Terms and Conditions of Annual Bonuses” below for a further description of our annual bonuses awarded to Dr. Dempsey. His offer letters also contain certain non-disparagement and non-competition restrictive covenants (during Dr. Dempsey’s employment and for 12 months following termination).

The offer letter also provides Dr. Dempsey with certain severance and change of control benefits. In the event Dr. Dempsey is terminated without “cause” (as defined below) at any time within 12 months following a change of control, then in addition to the severance payments described below, the vesting and exercisability of Dr. Dempsey’s option granted on June 17, 2008 will accelerate in full.

In addition, in the event that Dr. Dempsey is terminated without cause, subject to executing and not revoking a general release of all claims against us, then Dr. Dempsey is entitled to receive a severance payment equal to 12 months of his base salary plus his annual bonus for the year preceding the termination date, payable in substantially equal installments over the six-month period following his termination.

“Change of control” has the same meaning as under the Raanes Agreement. “Cause” means Dr. Dempsey’s (i) willful failure to perform his material duties, other than a failure resulting from his complete or partial incapacity due to long-term physical or mental illness or impairment, (ii) willful act that constitutes gross misconduct and that is injurious to the company, (iii) willful breach of a provision of the offer letter, (iv) material or willful violation of a federal or state law or regulation applicable to the business of the company, or (v) conviction or plea of guilty or no contest to a felony.

Offer Letter to Michael Brandt

In December 2011, we entered into an offer letter with Mr. Brandt that provides for employment at-will and other terms and conditions similar to Dr. Dempsey, except as provided below. Mr. Brandt’s base salary for 2014 was $250,000. Mr. Brandt is also eligible for additional compensation under the company’s sales compensation plan. Please see the section below titled “Terms and Conditions of Sales Compensation Plan” for a further description of Mr. Brandt’s sales commissions.

The offer letter also provides Mr. Brandt with certain severance and change of control benefits. In the event Mr. Brandt is terminated without cause or resigns for “good reason” (as defined below) at any time within 12 months following a change of control, then in addition to the severance payments described below, the vesting and exercisability of Mr. Brandt’s option granted under his offer letter will accelerate in full.

In addition, in the event that Mr. Brandt is terminated without cause or resigns for good reason, subject to executing and not revoking a general release of all claims against us, then Mr. Brandt is entitled to receive a severance payment equal to four months of his base salary plus one-third of his annual bonus for the year preceding the termination date payable in substantially equal installments over the four-month period following his termination.

 

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“Change of control” has the same meaning as under the Raanes Agreement. “Cause” has the same meaning as under Dr. Dempsey’s offer letter, “Good reason” means the occurrence of one or more of the following conditions, without Mr. Brandt’s consent and without remedy by the company: (i) a material reduction in his compensation, including but not limited to his level of base salary and annual bonus opportunity, other than reductions approved by the board of directors that are applicable to all employees; (ii) a material, non-voluntary, reduction in his authority, duties, position, title or responsibilities or a material, adverse change in his reporting structure; or (iii) a reduction in the kind or level of his benefits to which he was entitled immediately prior to such reduction, other than reductions approved by the board of directors that are applicable to all employees of the company.

Terms and Conditions of Annual Bonuses

For 2014, all of our NEOs were eligible for cash performance-based bonuses pursuant to the achievement of certain performance objectives. The performance targets are approved annually by our board of directors. When determining the 2014 performance bonus program for our NEOs, in late 2013, the board of directors set certain performance goals, using a mixture of performance objectives after receiving input from our Chief Executive Officer. These performance objectives included installing MRIdian systems and commencing patient treatment, obtaining new sales orders, building manufacturing capabilities, implementing cost-reduction programs and building a world class management and employee team. There was no specific weighting for each performance goal when determining the overall bonus amount, and instead the board of directors evaluated the overall achievement of all performance goals based on the importance to the success of the company. For each of these performance goals under the annual bonus program, the board of directors set general performance goals, but there was no minimum or maximum achievement for each performance target; instead, the board of directors weighed the achievement, partial achievement or non-achievement for each performance target when deciding the overall achievement level. These performance goals were not expected to be attained based on average or below-average performance. Our board of directors intended for the performance targets to require significant effort on the part of our NEOs and, therefore, set these targets at levels they believed would be difficult to achieve, such that average or below-average performance would not satisfy these targets.

Each NEO’s target bonus opportunity is expressed as a percentage of base salary which can be achieved by meeting corporate goals. For each of our NEOs, his target bonus opportunity is originally set in his employment agreement or offer letter, as applicable, with the company as described above. Our board of directors reviews these target percentages to ensure they are adequate, and, while reviewing these target percentages the board of directors does not follow a formula but rather uses the factors as general background information prior to determining the target bonus opportunity rates for our participating NEOs. The board of directors sets these rates based on each participating executive’s experience in his role with the company and the level of responsibility held by each executive, which the board of directors believes directly correlates to his ability to influence corporate results. For 2014, the board of directors used a guideline target bonus opportunity of 50% for Mr. Raanes and 35% for Dr. Dempsey and Mr. Brandt.

Corporate goals and performance targets are reviewed and approved by the board of directors prior to any allocation of the annual bonuses. In early 2015, the board of directors reviewed our 2014 company-wide performance with respect to determining bonuses for executive officers and determined achievement of the performance goals at 75%. Following its review and determinations, the board of directors awarded cash bonuses to the NEOs at 75% of their target bonus opportunity ($155,625 for Mr. Raanes, $68,250 for Dr. Dempsey and $65,625 for Mr. Brandt). The NEOs’ 2014 annual bonuses are set forth in the “2014 Summary Compensation Table” above.

 

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Terms and Conditions of Sales Compensation Plan

For 2014, in addition to the target performance bonus amount described above, Mr. Brandt was also eligible for performance-based cash incentives under a sales compensation plan. For 2014, under his sales compensation plan, Mr. Brandt was eligible to earn commissions based upon the achievement of certain sales targets. For 2014, each of these sales targets were set at levels we determined would require significant effort to achieve and would not be met by average or below-average performance. Commissions for the sales targets are payable monthly or semi-monthly, at our sole discretion. For 2014, Mr. Brandt was awarded $41,000 for achievement of the sales commissions goals.

Terms and Conditions of Equity Awards

In 2014, we granted two options to each of our NEOs. The table above entitled “Outstanding Equity Awards at 2014 Year End” describes the material terms of other option awards made in past fiscal years to our NEOs. In April 2014, our board of directors granted the following options to purchase our common stock to each of our NEOs: 951,158 shares and 362,000 shares with vesting commencement dates of May 11, 2013 and November 11, 2013, respectively, for Mr. Raanes; 234,314 shares and 580,385 shares with vesting commencement dates of May 11, 2013 and November 11, 2013, respectively, for Dr. Dempsey; and 61,775 shares and 17,238 shares with vesting commencement dates of May 11, 2013 and November 11, 2013, respectively, for Mr. Brandt. Each of these options had an exercise price of $0.31 per share, which the board determined was the fair market value on the date of grant. The options vest and become exercisable in 48 monthly installments on each monthly anniversary of the applicable vesting commencement date, such that all awards will be vested on the four-year anniversary of the vesting commencement date, subject to the individual continuing to provide services to us through each such vesting date.

Terms and Conditions of 401(k) Plan

In June 2008, we adopted our 401(k) Retirement Savings Plan for employees. The 401(k) plan is intended to qualify under Section 401(k) of the Code so that contributions to the 401(k) plan by employees or by us, and the investment earnings thereon, are not taxable to the employees until withdrawn from the 401(k) plan, and so that contributions by us, if any, will be deductible by us when made. Under the 401(k) plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and to have the amount of such reduction contributed to the 401(k) plan. We do not currently make any matching contributions under our 401(k) plan.

Equity Compensation Plans

The principal features of our equity incentive plans and agreements are summarized below. These summaries are qualified in their entirety by reference to the text of the plans or agreements, which are filed as exhibits to the registration statement of which this prospectus is a part.

2015 Equity Incentive Award Plan