0001564590-16-029244.txt : 20161114 0001564590-16-029244.hdr.sgml : 20161111 20161114160429 ACCESSION NUMBER: 0001564590-16-029244 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 66 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161114 DATE AS OF CHANGE: 20161114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ViewRay, Inc. CENTRAL INDEX KEY: 0001597313 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 421777485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37725 FILM NUMBER: 161994757 BUSINESS ADDRESS: STREET 1: 2 THERMO FISHER WAY CITY: OAKWOOD VILLAGE STATE: OH ZIP: 44146 BUSINESS PHONE: 440-703-3210 MAIL ADDRESS: STREET 1: 2 THERMO FISHER WAY CITY: OAKWOOD VILLAGE STATE: OH ZIP: 44146 FORMER COMPANY: FORMER CONFORMED NAME: Mirax Corp DATE OF NAME CHANGE: 20140116 10-Q 1 vray-10q_20160930.htm 10-Q vray-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to     

Commission File Number: 001-37725

 

ViewRay, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

42-1777485

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2 Thermo Fisher Way

Oakwood Village, OH

44146

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (440) 703-3210

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   No  

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

 

  (Do not check if a small reporting company)

  

Small reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 14, 2016, the registrant had 43,472,758 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


VIEWRAY, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

3

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

5

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

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

 

21

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

Item 4.

Controls and Procedures

 

34

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

35

 

 

 

 

Item 1A.

Risk Factors

 

35

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

66

 

 

 

 

Item 4.

Mine Safety Disclosures

 

67

 

 

 

 

Item 5.

Other Information

 

67

 

 

 

 

Item 6.

Exhibits

 

67

 

 

 

 

 

Signatures

 

68

 


2


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, or this Report, contains forward-looking statements, including, without limitation, in the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of commercially viable products, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the SEC and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation:

 

market acceptance of MRI-guided radiation therapy;

 

the benefits of MRI-guided radiation therapy;

 

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

 

the performance of MRIdian in clinical settings;

 

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

 

the pricing and reimbursement of MRI-guided radiation therapy;

 

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

 

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

 

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

 

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

 

our financial performance;

 

our expectations related to the MRIdian linear accelerator technology, or MRIdian Linac;

 

developments relating to our competitors and the healthcare industry; and

 

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

Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A, titled “Risk Factors” and discussed elsewhere in this Report.  Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise, except as required by law.


3


This Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain devices, including data regarding the estimated size of those markets.  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 reflected 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.

4


PART I—FINANCIAL INFORMATION

 

Item 1. Unaudited Condensed Consolidated Financial Statements

VIEWRAY, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,607

 

 

$

20,667

 

Accounts receivable

 

 

300

 

 

 

830

 

Inventory

 

 

10,398

 

 

 

8,073

 

Deposits on purchased inventory

 

 

4,913

 

 

 

3,936

 

Deferred cost of revenue

 

 

10,220

 

 

 

8,782

 

Prepaid expenses and other current assets

 

 

2,209

 

 

 

1,329

 

Total current assets

 

 

42,647

 

 

 

43,617

 

Property and equipment, net

 

 

11,908

 

 

 

7,306

 

Restricted cash

 

 

1,143

 

 

 

943

 

Intangible assets, net

 

 

102

 

 

 

200

 

Other assets

 

 

31

 

 

 

91

 

TOTAL ASSETS

 

$

55,831

 

 

$

52,157

 

LIABILITIES AND STOCKHOLDERS’

   DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,679

 

 

$

4,358

 

Accrued liabilities

 

 

5,618

 

 

 

5,413

 

Customer deposits

 

 

14,300

 

 

 

12,763

 

Deferred revenue, current portion

 

 

12,006

 

 

 

5,616

 

Total current liabilities

 

 

33,603

 

 

 

28,150

 

Long-term debt, net

 

 

44,213

 

 

 

29,016

 

Deferred revenue

 

 

3,656

 

 

 

345

 

Warrant liability

 

 

4,372

 

 

 

 

Other long-term liabilities

 

 

3,496

 

 

 

1,603

 

TOTAL LIABILITIES

 

 

89,340

 

 

 

59,114

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Common stock, par value of $0.01 per share; 300,000,000 shares authorized at

   September 30, 2016 and December 31, 2015; 43,354,677 and 38,204,960 shares

   issued and outstanding at September 30, 2016 and December 31, 2015

 

 

424

 

 

 

372

 

Preferred stock, par value of $0.01 per share; 10,000,000 shares authorized at

   September 30, 2016 and December 31, 2015; no shares issued and outstanding at

   September 30, 2016 and December 31, 2015

 

 

 

 

 

 

Additional paid-in capital

 

 

202,737

 

 

 

189,712

 

Accumulated deficit

 

 

(236,670

)

 

 

(197,041

)

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(33,509

)

 

 

(6,957

)

TOTAL LIABILITIES AND STOCKHOLDERS’

   DEFICIT

 

$

55,831

 

 

$

52,157

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


VIEWRAY, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

 

 

$

5,020

 

 

$

5,240

 

 

$

5,119

 

Service

 

 

298

 

 

 

56

 

 

 

813

 

 

 

419

 

Distribution rights

 

 

59

 

 

 

 

 

 

59

 

 

 

 

Grant

 

 

 

 

 

240

 

 

 

 

 

 

240

 

Total revenue

 

 

357

 

 

 

5,316

 

 

 

6,112

 

 

 

5,778

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

803

 

 

 

5,766

 

 

 

6,869

 

 

 

6,311

 

Service

 

 

380

 

 

 

325

 

 

 

1,705

 

 

 

1,390

 

Total cost of revenue

 

 

1,183

 

 

 

6,091

 

 

 

8,574

 

 

 

7,701

 

Gross margin

 

 

(826

)

 

 

(775

)

 

 

(2,462

)

 

 

(1,923

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,654

 

 

 

2,902

 

 

 

9,017

 

 

 

7,408

 

Selling and marketing

 

 

1,570

 

 

 

1,124

 

 

 

4,251

 

 

 

3,315

 

General and administrative

 

 

5,829

 

 

 

4,282

 

 

 

17,937

 

 

 

15,779

 

Total operating expenses

 

 

10,053

 

 

 

8,308

 

 

 

31,205

 

 

 

26,502

 

Loss from operations

 

 

(10,879

)

 

 

(9,083

)

 

 

(33,667

)

 

 

(28,425

)

Interest income

 

 

1

 

 

 

 

 

 

2

 

 

 

1

 

Interest expense

 

 

(1,707

)

 

 

(1,053

)

 

 

(4,166

)

 

 

(2,376

)

Other income (expense), net

 

 

(1,561

)

 

 

(124

)

 

 

(1,798

)

 

 

(89

)

Loss before provision for income taxes

 

$

(14,146

)

 

$

(10,260

)

 

$

(39,629

)

 

$

(30,889

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(14,146

)

 

$

(10,260

)

 

$

(39,629

)

 

$

(30,889

)

Net loss per share, basic and diluted

 

$

(0.35

)

 

$

(0.35

)

 

$

(1.02

)

 

$

(2.96

)

Weighted-average common shares used to compute net loss per

   share attributable to common stockholders, basic and diluted

 

 

40,156,851

 

 

 

29,157,069

 

 

 

38,915,156

 

 

 

10,433,051

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


VIEWRAY, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(39,629

)

 

$

(30,889

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,325

 

 

 

913

 

Stock-based compensation

 

 

2,199

 

 

 

531

 

Accretion on asset retirement obligation

 

 

26

 

 

 

 

Change in fair value of warrant liability

 

 

1,646

 

 

 

(45

)

Loss on disposal of property and equipment

 

 

5

 

 

 

 

Inventory lower of cost or market adjustment

 

 

928

 

 

 

995

 

Write-off of deferred offering cost

 

 

 

 

 

2,920

 

Amortization of debt discount and interest accrual

 

 

1,806

 

 

 

573

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

530

 

 

 

903

 

Inventory

 

 

(3,370

)

 

 

(2,406

)

Deposits on purchased inventory

 

 

(977

)

 

 

(2,223

)

Deferred cost of revenue

 

 

(1,438

)

 

 

409

 

Prepaid expenses and other assets

 

 

(820

)

 

 

(664

)

Accounts payable

 

 

(2,645

)

 

 

(6,048

)

Notes payable

 

 

 

 

 

(240

)

Accrued expenses and other long-term liabilities

 

 

1,106

 

 

 

392

 

Customer deposits and deferred revenue

 

 

11,238

 

 

 

3,574

 

Net cash used in operating activities

 

 

(28,070

)

 

 

(31,305

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(6,672

)

 

 

(2,906

)

Purchase of intangibles and other assets

 

 

(12

)

 

 

 

Change in restricted cash balance

 

 

(200

)

 

 

500

 

Net cash used in investing activities

 

 

(6,884

)

 

 

(2,406

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of convertible preferred stock, net of issuance cost

 

 

 

 

 

15,729

 

Proceeds from draw down of long-term debt, net of debt discount

 

 

14,982

 

 

 

27,381

 

Payments of long-term debt

 

 

 

 

 

(15,000

)

Proceeds from 2016 private placement, gross

 

 

13,750

 

 

 

 

Payment of offering costs related to 2016 private placement

 

 

(222

)

 

 

 

Proceeds from 2015 private placement, gross

 

 

 

 

 

29,447

 

Payment of offering costs related to 2015 private placement

 

 

 

 

 

(2,302

)

Payment of offering costs related to initial public offering

 

 

 

 

 

(628

)

Proceeds from the exercise of stock options

 

 

384

 

 

 

19

 

Net cash provided by financing activities

 

 

28,894

 

 

 

54,646

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(6,060

)

 

 

20,935

 

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD

 

 

20,667

 

 

 

11,129

 

CASH AND CASH EQUIVALENTS — END OF PERIOD

 

$

14,607

 

 

$

32,064

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,349

 

 

$

1,711

 

Cash paid for taxes

 

$

 

 

$

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

169

 

 

$

309

 

Transfer of property and equipment from inventory

 

$

117

 

 

$

 

Offering cost in accounts payable and accrued expenses

 

$

308

 

 

$

605

 

7


Fair value of common stock warrants issued to placement agents for service in

   2015 private placement

 

$

 

 

$

316

 

Conversion of convertible preferred stock to common stock in connection with the

   Merger

 

$

 

 

$

160,839

 

Conversion of convertible preferred stock warrants into common stock warrants

 

$

 

 

$

93

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.


8


VIEWRAY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.

Background and Organization

On July 8, 2015, ViewRay, Inc. (f/k/a Mirax Corp.), or ViewRay, we, us, our, or the Company, completed a 1.185763-for-1 forward stock split of its common stock in the form of a dividend with the result that 4,343,339 shares of common stock, par value $0.001 per share, outstanding immediately prior to the stock split became 5,150,176 shares of common stock, par value $0.001 per share, outstanding immediately thereafter. On July 15, 2015, the Company changed its name to ViewRay, Inc. by filing the Certificate of Amendment to its Articles of Incorporation. Additionally, on July 21, 2015, the Company changed its domicile from the State of Nevada to the State of Delaware by reincorporation, or the Conversion, and as a result of the Conversion, increased its authorized capital stock from 75,000,000 shares of common stock, par value $0.001 per share, to 300,000,000 shares of common stock, par value $0.01 per share and 10,000,000 shares of “blank check” preferred stock, par value $0.01 per share.

On July 23, 2015, the Company and ViewRay Technologies, Inc. (f/k/a ViewRay Incorporated) consummated an Agreement and Plan of Merger and Reorganization, or Merger Agreement. Pursuant to the Merger Agreement, the stockholders of ViewRay Technologies, Inc. contributed all of their equity interests to the Company for shares of the Company’s common stock and merged with the Company’s subsidiary, which resulted in ViewRay Technologies, Inc. becoming a wholly-owned subsidiary of the Company, or the Merger.

On August 17, 2015, the Company completed the third and final closing of a private placement offering, or the 2015 Private Placement, through which it sold an aggregate of 5,884,504 shares of its common stock at a purchase price of $5.00 per share and raised a total of $26.3 million, net of offering costs.

The Merger was accounted for as a reverse-merger and recapitalization.  ViewRay Technologies, Inc. is the acquirer for the financial reporting purposes and ViewRay, Inc. is the acquired company under the acquisition method of accounting.  Consequently, the assets, liabilities and operations that were reflected in the historical consolidated financial statements prior to the Merger became those of ViewRay Technologies, Inc. and were recorded at the historical cost basis, and the condensed consolidated financial statements after completion of the Merger included the assets, liabilities and results of operations of ViewRay Technologies, Inc. up to the day prior to the closing of the Merger and the assets, liabilities and results of operations of the combined company from and after the closing date of the Merger.  

On March 31, 2016, the Company’s shares of common stock commenced trading on the Nasdaq Global Market under the symbol “VRAY.”  Prior to this time, the Company’s common stock was quoted on the OTC Markets, OTCQB tier of OTC Markets Group, Inc. under the same symbol.  

On September 9, 2016, the Company completed the final closing of a private placement offering, or the 2016 Private Placement, through which it sold an aggregate of 4,602,506 shares of its common stock at a purchase price of $2.95 per share and warrants that provide the option holder the right to purchase 1,380,745 shares of common stock, or the 2016 Placement Warrants, at a price of $0.125 per share, and raised a total of $13.2 million, net of offering costs.

ViewRay, Inc. and its wholly-owned subsidiary ViewRay Technologies, Inc., designs, manufactures and markets MRIdian, the first and only MRI-guided radiation therapy system to image and treat cancer patients simultaneously.

Since inception, ViewRay Technologies, Inc. has devoted substantially all of its efforts towards research and development, initial selling and marketing activities, raising capital and preparing for the manufacturing and shipment of MRIdian systems. In May 2012, ViewRay Technologies, Inc. was granted clearance from the U.S. Food and Drug Administration, or FDA, to sell MRIdian. In November 2013, ViewRay Technologies, Inc. received its first clinical acceptance of a MRIdian at a customer site, and the first patient was treated with that system in January 2014. ViewRay Technologies, Inc. has had the right to affix the CE mark to MRIdian in the European Union, or EU, since November 2014.  In August 2016, the Company submitted an application for the MRIdian Linac 510(k) marketing clearance to the FDA and in September 2016, it received CE mark approval in the EU.

 

The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for a reasonable period of time.  The Company’s principal sources of liquidity are cash flows from investment capital and available borrowings under its Term Loan agreement.  These have historically been sufficient to meet working capital needs, capital expenditures, and debt service obligations.  During the nine months ended September 30, 2016, the Company incurred a net loss from operations of $39.6 million and used cash from operations of $28.1 million.  The Company plans that it will have sufficient cash to continue as a going concern; however, these plans rely on certain underlying assumptions and estimates that may differ from actual results.  Such assumptions include the Company receiving FDA approval for and commercializing MRIdian Linac, which may

9


broaden the Company’s addressable market, accelerate the Company’s sales cycle, accelerate backlog conversion time and improve gross margins.  The Company expects that its existing cash and cash equivalents, together with cash receipts from sales of MRIdian systems, the additional draw down from the CRG Term Loan and the plan to raise additional financing from various sources from time to time will enable the Company to conduct its planned operations for at least the next 12 months.

2.

Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, and pursuant to the rules and regulation of the Securities and Exchanges Commission, or SEC. The condensed consolidated financial statements include the accounts of ViewRay, Inc. and its wholly-owned subsidiary, ViewRay Technologies, Inc.  All inter-company accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements have been included. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any future period. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015.

The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 28, 2016, and have not changed significantly since such filing.  

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosures about the nature, amount, timing and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date by one year with early adoption permitted as of the original effective date.  ASU No. 2014-09 will be effective for the Company’s fiscal year beginning after December 15, 2017, and the interim periods thereafter.  In addition, the FASB issued ASU 2016-08, 2016-10 and 2016-12 in March 2016, April 2016 and May 2016, respectively, to help provide interpretive clarification on the new guidance in ASC Topic 606.  ASU No. 2016-08, 2016-10 and 2016-12 are all effective during the same period as ASU 2014-09.  The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), which requires management to assess if there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances.  In connection with each annual and interim period, management must assess if there is substantial doubt about an entity’s ability to continue as a going concern within one year after the financial statement issuance date.  Disclosures are required if conditions give rise to substantial doubt.  The new standard is effective for all entities in the first annual period ending after December 15, 2016, and for annual and interim periods thereafter.  The Company is reviewing the provisions of ASU No. 2014-15 and expects that the new guidance will not have a material impact on its consolidated financial statements and related disclosures.  

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU No. 2015-11 is effective prospectively for annual periods beginning after December 15, 2016 and interim periods therein. Early application is permitted. The Company is reviewing the provisions of ASU No. 2015-11 and expects that the new guidance will not have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the Accounting Standards Codification 840, Leases. This ASU requires lessees to begin recognize all leases, with exception of short-term lease, as a lease liability on the balance sheet. Under this ASU, a lease is defined as a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset which is an asset that represents the lessee’s right to use, or control the use of, a specified asset during the lease term. The ASU also requires additional disclosures about the amount, timing and uncertainty of cash flow from leases. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is

10


permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods therein.  Early adoption is permitted.  The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.  

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU No. 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be made prospectively as of the earliest date practicable. The amendments in ASU 2015-15 are effective for fiscal years beginning after December 15, 2017, and interim periods therein. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures.  

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in the consolidated balance sheets. To simplify the presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified as non-current in the consolidated balance sheets. ASU No. 2015-17 is effective for annual periods beginning after December 15, 2016 and interim periods therein. Early application is permitted.  The Company has elected to early adopt this guidance starting April 1, 2016 on a prospective basis.  As a result of adopting this standard, deferred tax liabilities and assets, if any, are presented within the financial statements as noncurrent.  

3.

Balance Sheet Components

Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Prototype

 

$

6,405

 

 

$

6,492

 

Machinery and equipment

 

 

6,148

 

 

 

7,128

 

Leasehold improvements

 

 

4,621

 

 

 

1,532

 

Furniture and fixtures

 

 

363

 

 

 

350

 

Software

 

 

960

 

 

 

832

 

Construction in progress

 

 

5,331

 

 

 

1,851

 

Property and equipment, gross

 

 

23,828

 

 

 

18,185

 

Less: accumulated depreciation and amortization

 

 

(11,920

)

 

 

(10,879

)

Property and equipment, net

 

$

11,908

 

 

$

7,306

 

 

Depreciation and amortization expense related to property and equipment were $451 thousand, $280 thousand during the three months ended September 30, 2016 and 2015, and $1.2 million and $788 thousand during the nine months ended September 30, 2016 and 2015, respectively.

11


Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

License cost

 

$

512

 

 

$

500

 

Patents

 

 

104

 

 

 

104

 

Intangible assets, gross

 

$

616

 

 

$

604

 

Accumulated amortization

 

 

(514

)

 

 

(404

)

Intangible assets, net

 

$

102

 

 

$

200

 

 

Intangible amortization expense were $18 thousand, $42 thousand during the three months ended September 30, 2016 and 2015, and $110 thousand and $125 thousand during the nine months ended September 30, 2016 and 2015, respectively. Amortization of intangible assets was recorded in general and administrative expenses in the condensed consolidated statements of operations.

At September 30, 2016, the estimated future amortization expense of purchased intangible assets was as follows (in thousands):

 

Year Ending December 31,

 

Estimated Future

Amortization

Expense

 

 

 

(Unaudited)

 

The remainder of 2016

 

$

5

 

2017

 

 

19

 

2018

 

 

19

 

2019

 

 

19

 

2020

 

 

19

 

2021

 

 

11

 

Thereafter

 

 

10

 

Total amortization expense

 

$

102

 

 

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Accrued payroll and related benefits

 

$

3,123

 

 

$

1,938

 

Accrued accounts payable

 

 

1,199

 

 

 

1,880

 

Sales tax and medical device excise tax payable

 

 

96

 

 

 

219

 

Accrued legal, accounting and governance fees

 

 

783

 

 

 

857

 

Other

 

 

417

 

 

 

519

 

Total accrued liabilities

 

$

5,618

 

 

$

5,413

 

 Deferred Revenue

Deferred revenue consisted of the following (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Deferred revenue:

 

 

 

 

 

 

 

 

Product

 

$

10,900

 

 

$

5,050

 

Services

 

 

821

 

 

 

911

 

Distribution rights (see Note 7)

 

 

3,941

 

 

 

 

Total deferred revenue

 

 

15,662

 

 

 

5,961

 

Less: current portion of deferred revenue

 

 

(12,006

)

 

 

(5,616

)

Noncurrent portion of deferred revenue

 

$

3,656

 

 

$

345

 

12


 

 

4.

Fair Value of Financial Instruments

The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at September 30, 2016 and December 31, 2015. Level 3 liabilities that are measured on a recurring basis consist of the convertible preferred stock warrant liability and the 2016 Placement Warrants liability. The convertible preferred stock warrant liability and 2016 Placement Warrants liabilities were valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock and estimated term would result in a directionally similar impact to the fair value of the warrants (see Note 9).

The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other income (expense), net in the condensed consolidated statements of operations. The Company recorded a loss of $6 thousand and a gain of $45 thousand related to the change in fair value of convertible preferred stock warrants for the three and nine months ended September 30, 2015. The convertible preferred stock warrants were converted into warrants to purchase the Company’s common stock upon the consummation of the Merger in July 2015. The aggregate fair value of these convertible preferred stock warrants upon the consummation of the Merger was $93 thousand which was reclassified from liabilities to additional paid-in-capital, and the Company no longer recorded change in fair value adjustments thereafter.  The Company recorded a loss of $1.6 million related to the change in fair value of the 2016 Placement Warrants for the three and nine months ended September 30, 2016.  

 

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy (in thousands):

 

 

At September 30, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

 

2016 Placement Warrants

 

$

 

 

$

 

 

$

4,372

 

 

$

4,372

 

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 financial liabilities (in thousands):

 

 

 

Nine Months

Ended

September 30, 2016

 

 

 

(Unaudited)

 

Fair value, beginning of period

 

$

 

Issuance of 2016 Placement Warrants

 

 

2,726

 

Change in fair value of Level 3 financial liabilities

 

 

1,646

 

Fair value, end of period

 

$

4,372

 

 

5.

Debt

 

Hercules Term Loan

In December 2013, ViewRay Technologies, Inc. entered into a Loan and Security Agreement, or the Hercules Term Loan, with Hercules Technology Growth Capital, Inc. and Hercules Technology III, L.P., or together, Hercules, for $15.0 million that was outstanding at December 31, 2014. Borrowings under the Hercules 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, 2014. In addition, borrowings under the Hercules 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 and the entire balance of the Hercules Term Loan are to be paid in full by the June 1, 2017 maturity date. The Hercules Term Loan is subject to a prepayment penalty of 5% on the outstanding balance during the first 12 months following the funding of the loan and 1% on the outstanding balance thereafter until maturity. The Hercules Term Loan was issued at a discount of $466 thousand, which was amortized to interest expense during the life of the loan using the effective interest method. The discount included the fair value of a convertible preferred stock warrant that was issued with the Hercules Term Loan, as discussed in the following paragraph, and the related transaction costs. The Hercules Term Loan is collateralized by essentially all the assets of ViewRay Technologies, Inc. and limits its ability with respect to additional indebtedness, investments or dividends, among other things, subject to customary exceptions.

In connection with the issuance of the Hercules Term Loan, ViewRay Technologies, Inc. entered into a Warrant Agreement with Hercules to issue a fully-vested and exercisable warrant to purchase 128,231 shares of Series C convertible preferred stock with an

13


exercise price of $5.84 per share. The warrant is exercisable any time before the later of 10 years from issuance or five years after an IPO. The warrant provides for anti-dilution rights on the Series C convertible preferred stock, which includes one-time down-round protection. The fair value of the warrant upon issuance of $158 thousand was recorded as convertible preferred stock warrant liability and a discount to the carrying value of the Hercules Term Loan. The fair value of the warrant at the time of issuance was estimated using the Black-Scholes option-pricing model with the following assumptions: expected term of two years, expected volatility of 30%, risk-free interest rate of 0.4% and expected dividend yield of 0%. The convertible preferred stock warrants were converted into warrants to purchase the Company’s common stock upon the consummation of the Merger in July 2015 as disclosed in Notes 1 and 4. The aggregate fair value of these warrants upon the closing of the Merger was $93 thousand which was reclassified from liabilities to additional paid-in-capital, and the Company no longer recorded change in fair value adjustments thereafter.

In June 2015, ViewRay Technologies, Inc. paid off in full the outstanding balances on Hercules Term Loan, including the related interest and other penalty fee, using part of the proceeds received from the CRG Term Loan discussed below.

 

CRG Term Loan

In June 2015, ViewRay Technologies, Inc. entered into a Term Loan Agreement, or the CRG Term Loan, with Capital Royalty Partners II L.P., Capital Royalty Partners II – Parallel Fund “A” L.P., Capital Royalty Partners II (Cayman) L.P. and Parallel Investment Opportunities Partners II L.P. or together with their successors by assignment, CRG, for up to $50.0 million of which $30.0 million was made available to the Company upon closing with the remaining $20.0 million to be available on or before June 26, 2016 at its option upon the occurrence of either (i) an initial public offering of its common stock on a nationally recognized securities exchange that raises a minimum of $40.0 million in net cash proceeds with a minimum of $120.0 million post-money valuation, or Qualifying IPO, or (ii) achievement of a minimum of $25.0 million gross revenue from the sales of the MRIdian system during any consecutive 12 months before March 31, 2016. The Company drew down the first $30.0 million on closing date. The CRG Term Loan has a maturity date of June 26, 2020 and bears cash interest at a rate of 12.5% per annum to be paid quarterly during the interest-payment-only period of 3 years. The interest-payment-only period can be extended for another year until June 26, 2019 if the Company completes an underwritten public offering on or before June 26, 2018. During the interest-payment-only period, the Company has the option to elect to pay only 8% of the 12.5% per annum interest in cash, and the remaining 4.5% of the 12.5% per annum interest as compounded interest, or deferred payment in-kind interest, added to the aggregate principal amount of the CRG Term Loan. Principal payment and any deferred payment in-kind interest will be paid quarterly in equal installments following the end of the interest-payment-only period through maturity date.

In March 2016, the Company and CRG executed an amendment to the original terms of the CRG Term Loan such that, with regard to the conditions for borrowing the remaining $20.0 million available under the CRG Term Loan, the Company may, at its election, draw down (i) an amount of either $10.0 million or $15.0 million in up to two advances upon achievement of a minimum of $15.0 million of aggregate product and service revenue during any consecutive 12 month period ending on or before March 31, 2016 and (ii) an additional $5.0 million (or $10.0 million, if the previous draw made was only in an amount of $10.0 million) upon achievement of a minimum of $25.0 million of aggregate product and service revenue during any consecutive 12 month period ending on or before December 31, 2016 and upon execution of the first sales contract of the Company’s second generation product.  The Company achieved the minimum of $15.0 million gross revenue requirement in March 2016 which made the first $15.0 million of the remaining $20.0 million credit facility immediately available for draw down.  In May 2016, the Company drew down the additional $15.0 million available amount.  At September 30, 2016, the Company had $45.0 million in outstanding debt to CRG.

The CRG Term Loan is subject to a prepayment penalty of 3% on the outstanding balance during the first 12 months following the funding of the Term Loan, 2% on the outstanding balance after year 1 but on or before year 2, 1% on the outstanding balance after year 2 but on or before year 3, and 0% on the outstanding loan if prepaid after year 3 thereafter until maturity. The Term Loan is also subject to a facility fee of 7% based on the sum of the amount drawn and any outstanding payment in-kind interest payable on maturity date or the date such loan becomes due. All direct financing costs were accounted for as a discount on the CRG Term Loan and will be amortized to interest expense during the life of the loan using the effective interest method. The CRG Term Loan is subject to financial covenants and is collateralized by essentially all assets of the Company and limits its ability with respect to additional indebtedness, investments or dividends, among other things, subject to customary exceptions.

 

14


6.

Commitments and Contingencies

Operating Leases

The Company leases office space in Oakwood Village, Ohio and Mountain View, California under non-cancellable operating leases. At September 30, 2016, the future minimum payments for the operating leases are as follows (in thousands):

 

Year Ending December 31,

 

Future Minimum

Payments

 

The remainder of 2016

 

$

283

 

2017

 

 

1,106

 

2018

 

 

963

 

2019

 

 

823

 

Total future minimum payments

 

$

3,175

 

 

Contingencies

The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount.

In the normal course of business, the Company may become involved in legal proceedings. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred. At September 30, 2016 and December 31, 2015, the Company was not involved in any material legal proceedings.

Purchase Commitments

At September 30, 2016 and December 31, 2015, the Company had no outstanding firm purchase commitments.

7.

Distribution Agreement

In December 2014, the Company entered into a distribution agreement with ltochu Corporation, or ltochu, a Japanese entity, pursuant to which the Company appointed ltochu as its exclusive distributor for the sale and delivery of the Company’s MRIdian products within Japan. In consideration of the exclusive distribution rights granted, ltochu agreed to pay a distribution fee of $4.0 million in three installments: (i) the first installment of $1.0 million was due upon execution of the distribution agreement; (ii) the second installment of $1.0 million was due within 10 business days following submission of the application for regulatory approval of the Company’s product to the Japan regulatory authority; and (iii) the final installment of $2.0 million was due within 10 business days following receipt of approval for the Company’s product from the Japanese Ministry of Health, Labor and Welfare. The distribution fee paid by ltochu was refundable if the Company failed to obtain the approval from the Japan regulatory authority before December 31, 2017. The first and second installments of $2.0 million in aggregate were received in December 2014 and December 2015, respectively, and were recorded as customer deposits in the accompanying condensed consolidated balance sheets at December 31, 2015.  In August 2016, the Company received the third and final $2.0 million installment upon the receipt of regulatory approval to market MRIdian in Japan. The entire $4.0 million distribution fee received was reclassified to deferred revenue as it was no longer refundable. The Company started recognizing distribution rights revenue on a straight-line basis over the remaining term of the exclusive distribution agreement of approximately 8.5 years. The distribution rights revenue was $59 thousand for the three and nine months September 30, 2016.

The exclusive distribution agreement has an initial term of 10 years from December 2014 and contains features customary in such distribution agreements. Under this distribution agreement, the Company will supply its products and services to ltochu based upon the Company’s then-current pricing. In conjunction with the distribution agreement, Itochu also purchased $5.2 million of Series C convertible preferred stock in December 2014 at a price of $5.84 per share and became a stockholder of the Company.  The Series C convertible preferred stock owned by Itochu was converted into common stock upon the consummation of the Merger in July 2015 as disclosed in Note 1.

8.

Convertible Preferred Stock

In January 2015, ViewRay Technologies, Inc. issued an aggregate of 162,407 shares of Series C convertible preferred stock to a new investor at a price of $5.84 per share for a total gross consideration of $950 thousand.

15


In February 2015, ViewRay Technologies, Inc. issued 2,564,652 shares of Series C convertible preferred stock to another investor at a price of $5.84 per share for total gross consideration of $15.0 million.

In July 2015, upon the closing of the Merger, all of ViewRay Technologies, Inc.’s 30,381,987 shares of outstanding convertible preferred stock were converted into the Company’s common stock at a 1:1 conversion rate.  As a result, the Company had no convertible preferred stock issued and outstanding at September 30, 2016 and December 31, 2015.  

9.

Warrants

In connection with the Hercules Term Loan (see Note 5, Debt), the Company issued a warrant to purchase 128,231 shares of Series C convertible preferred stock. The convertible preferred stock warrant was recorded as a liability and is 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 condensed consolidated statements of operations. At issuance, the fair value of the warrant was estimated to be $158 thousand. During the three and nine months ended September 30, 2015, the Company recorded a loss of $6 thousand and a gain of $45 thousand related to the change in fair value of preferred stock warrant liability. The warrant to purchase Series C convertible preferred stock was converted into a warrant to purchase 128,231 shares of the Company’s common stock upon the consummation of the Merger in July 2015.  As a result, the fair value of the preferred stock warrant liability of $93 thousand was reclassified into additional paid-in capital. At September 30, 2016 and December 31, 2015, the warrant had not been exercised and was still outstanding.

The Company used the Black-Scholes option-pricing model to estimate the fair value of the convertible preferred stock with the following weighted-average assumptions:

 

 

Upon the closing of the Merger on

July 23, 2015

 

Series C Warrant:

 

 

 

 

Expected term (in years)

 

 

5.0

 

Expected volatility

 

 

31.8%

 

Risk-free interest rate

 

 

1.7%

 

Expected dividend yield

 

 

0%

 

 

In connection with the Merger and the 2015 Private Placement, in July and August 2015, the Company issued the 2015 Private Placement warrants that provide the option holder the right to purchase 198,760 shares of common stock at an exercise price of $5.00 per share to private placement agents as payment for services provided. These 2015 Private Placement warrants are exercisable at any time at the option of the holder until the five year anniversary of its date of issuance.

The Company estimated the aggregate fair value of the 2015 Private Placement warrants on the issuance date to be $316 thousand which was recorded in additional paid-in-capital as an offering cost against the total proceeds from the 2015 Private Placement.  The 2015 Private Placement warrants were accounted for as equity awards.  At September 30, 2016 and December 31, 2015, no 2015 Private Placement warrants had been exercised and all remain outstanding.  

The fair value of the 2015 Private Placement warrants was estimated at their grant dates =using the Black-Scholes pricing model and the following weighted-average assumptions:

 

 

 

Upon Issuance

 

Common Stock Warrant:

 

 

 

 

Expected term (in years)

 

 

5.0

 

Expected volatility

 

 

31.8%

 

Risk-free interest rate

 

 

1.6%

 

Expected dividend yield

 

 

0%

 

In connection with the 2016 Private Placement, in August and September 2016, the Company issued the 2016 Placement Warrants that provide the option holder the right to purchase 1,380,745 shares of common stock at an exercise price of $2.95 per share.  These 2016 Placement Warrants are exercisable at any time at the option of the holder until the seven year anniversary of its date of issuance. The 2016 Placement Warrants also contain protection whereby warrants will expire immediately prior to the consummation of a Change of Control and holders have the right to receive cash in the amount equal to the Black-Scholes value of warrants. A Change of Control is defined as (i) a merger or consolidation of the Company with another corporation, (ii) the sale, transfer or other disposal of substantially all of the assets or a majority of the Company’s outstanding shares of capital stock, (iii) a purchase or exchange offer accepted by the holders of a majority of the outstanding voting shares of the Company’s capital stock, or (iv) a “person” or “group,” as

16


defined by Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, is or will become the beneficial owner, directly or indirectly, of at least a majority of the voting power of the Company’s capital stock. The 2016 Placement Warrants were accounted for as a liability at the date of issuance and are adjusted to fair value at each balance sheet date, with the change in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations.  

As separate classes of securities were issued in a bundled transaction, the gross proceeds from the 2016 Private Placement of $13.8 million was allocated first to the 2016 Placement Warrants based on its fair value upon issuance, and the residual was allocated to the common stock. The fair value upon issuance of $2.7 million for the 2016 Placement Warrants was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected term of seven years, expected volatility of 61.6%, risk-free interest rate of 1.4% and expected dividend yield of 0%.

During the three and nine months ended September 30, 2016, the Company recorded a loss of $1.6 million related to the change in fair value of the 2016 Placement Warrants.  The fair value of the 2016 Placement Warrants of $4.4 million was estimated using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

 

 

September 30,

2016

 

2016 Placement Warrant:

 

 

 

 

Expected term (in years)

 

 

6.9

 

Expected volatility

 

 

64.3%

 

Risk-free interest rate

 

 

1.4%

 

Expected dividend yield

 

 

0%

 

At September 30, 2016, the 2016 Placement Warrants had not been exercised and were still outstanding.  

10.

Stock-Based Compensation

A summary of the Company’s stock option activity and related information is as follows:

 

 

 

 

 

 

 

Options Outstanding

 

 

 

Shares

Available

for Grant

 

 

Number

of Stock

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual Life

(Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Balance at December 31, 2015

 

 

3,166,968

 

 

 

6,053,672

 

 

$

2.13

 

 

 

7.6

 

 

$

20,605

 

Granted (unaudited)

 

 

(1,127,703

)

 

 

1,127,703

 

 

 

4.25

 

 

 

 

 

 

 

 

 

Exercised (unaudited)

 

 

 

 

 

(547,211

)

 

 

0.70

 

 

 

 

 

 

 

 

 

Cancelled (unaudited)

 

 

293,284

 

 

 

(293,284

)

 

 

4.39

 

 

 

 

 

 

 

 

 

RSUs granted (unaudited)

 

 

(112,578

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2016 (unaudited)

 

 

2,219,971

 

 

 

6,340,880

 

 

$

2.53

 

 

 

7.4

 

 

$

13,726

 

Vested and exercisable at September 30, 2016 (unaudited)

 

 

 

 

 

 

3,574,359

 

 

$

1.52

 

 

 

6.4

 

 

$

11,091

 

Vested and expected to vest at September 30, 2016 (unaudited)

 

 

 

 

 

 

6,090,787

 

 

$

2.48

 

 

 

7.4

 

 

$

13,461

 

 

The weighted-average grant date fair value of options granted to employees was $2.42 and $3.13 per share during the nine months ended September 30, 2016 and 2015, respectively. The grant date fair value of options vested was $1.9 million and $390 thousand during nine months ended September 30, 2016 and 2015, respectively.

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options.  

At September 30, 2016, total unrecognized compensation cost related to stock-based awards granted to employees, net of estimated forfeitures, was $5.5 million which is expected to be recognized over a weighted-average period of 3.0 years.

17


Determination of Fair Value

The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the estimated fair value of the Company’s common stock, as well as assumptions regarding a number of complex and subjective variables. The variables used to calculate the fair value of stock options using the Black-Scholes option-pricing model include actual and projected employee stock option exercise behaviors, expected price volatility of the Company’s common stock, the risk-free interest rate and expected dividends. Each of these inputs is subjective and generally requires significant judgment to determine.

Fair Value of Common Stock

Prior to the Merger, the fair value of the common stock underlying the stock-based awards was determined by ViewRay Technologies, Inc.’s board of directors, with input from management and third-party valuations. Post-Merger and up through March 30, 2016, our common stock shares were listed on the OTC Bulletin Board. Beginning March 31, 2016, our common stock shares were listed on The NASDAQ Global Market, or NASDAQ.  Fair value of the common stock is the adjusted closing price of the Company’s common stock on the trading date on these stock exchanges.

Expected Term

The expected term represents the period that the Company’s option awards are expected to be outstanding. The Company considers several factors in estimating the expected term of options granted, including the expected lives used by a peer group of companies within the Company’s industry that the Company considers to be comparable to its business and the historical option exercise behavior of its employees, which the Company believes is representative of future behavior.

Expected Volatility

As the Company does not have a sufficient trading history for its common stock, the expected stock price volatility for the Company’s 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 the Company’s industry which were the same as the comparable companies used in the common stock valuation analysis. The Company intends 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 its own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

Risk-Free Interest Rate

The risk-free interest rate is based on the zero coupon U.S. Treasury notes, with maturities similar to the expected term of the options.

Expected Dividend Yield

The Company does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero in the Black-Scholes option-valuation model.

In addition to the Black-Scholes assumptions discussed immediately above, the estimated forfeiture rate also has a significant impact on the related stock-based compensation. The forfeiture rate of stock options is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

The fair value of employee stock option was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:  

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Expected volatility%

 

 

59.9%

 

 

 

68.7%

 

Risk-free interest rate%

 

 

1.3%

 

 

 

1.8%

 

Expected dividend yield%

 

 

0.0%

 

 

 

0.0%

 

18


Restricted Stock Units

In September 2016, the Company granted 112,578 shares of Restricted Stock Units, or RSUs, to its board of directors for their past services. These RSUs were fully vested upon issuance and had a grant date fair value of $3.58 per share. For the three and nine months ended September 30, 2016, stock-based compensation expense related to RSUs were $403 thousand, which was included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations is classified as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

Research and development

 

$

111

 

 

$

95

 

 

$

467

 

 

$

143

 

Selling and marketing

 

 

40

 

 

 

16

 

 

 

78

 

 

 

26

 

General and administrative

 

 

803

 

 

 

272

 

 

 

1,654

 

 

 

362

 

Total stock-based compensation expense

 

$

954

 

 

$

383

 

 

$

2,199

 

 

$

531

 

 

During the three months and nine months ended September 30, 2016 and 2015, there were no stock-based compensation expenses capitalized as a component of inventory or recognized in cost of revenue. Stock-based compensation relating to stock-based awards granted to consultants were insignificant during the three months and nine months ended September 30, 2016 and 2015.

11.

Income Tax

Due to the current operating losses, the Company recorded zero income tax expense during the three and nine months ended September 30, 2016 and 2015, respectively.  There was no change in the income tax provision during the three and nine months ended September 30, 2016, as compared to the same periods during 2015.  The effective tax rate during the three and nine months ended September 30, 2016, as compared to the same periods during 2015, remained the same at approximately 37%.  During these periods, the Company’s activities were limited to U.S. federal and state tax jurisdictions, as it does not have any foreign operations.  

Due to the Company’s history of cumulative losses, management concluded that, after considering all the available objective evidence, it is not more likely than not that all of the Company’s net deferred tax assets will be realized.  Accordingly, the Company’s deferred tax assets, which includes net operating loss, or NOL, carryforwards and tax credits related primarily to research and development continue to be subject to a valuation allowance as of September 30, 2016.  The Company will continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.      

The Company had unrecognized tax benefit of $889 thousand and $742 thousand at September 30, 2016 and December 31, 2015, respectively.  The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets.  Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.  As of September 30, 2016, changes to the Company's uncertain tax positions in the next 12 months that are reasonably possible are not expected to have a significant impact on the Company's financial position or results of operations.

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense.  During the nine months ended September 30, 2016 and 2015, there were no accrued interest and penalties related to uncertain tax positions.