0001564590-17-011046.txt : 20170515 0001564590-17-011046.hdr.sgml : 20170515 20170515162924 ACCESSION NUMBER: 0001564590-17-011046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 71 CONFORMED PERIOD OF REPORT: 20170331 FILED AS OF DATE: 20170515 DATE AS OF CHANGE: 20170515 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: 17844724 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_20170331.htm 10-Q vray-10q_20170331.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 March 31, 2017

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 May 10, 2017, the registrant had 57,383,055 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

 

5

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

5

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

Item 2.

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

 

20

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

29

 

 

 

 

Item 4.

Controls and Procedures

 

29

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

31

 

 

 

 

Item 1A.

Risk Factors

 

31

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

64

 

 

 

 

Item 4.

Mine Safety Disclosures

 

64

 

 

 

 

Item 5.

Other Information

 

64

 

 

 

 

Item 6.

Exhibits

 

64

 

 

 

 

 

Signatures

 

65

 


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 Securities and Exchanges Commission, or 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)

(Unaudited)

 

 

 

March 31,

2017

 

 

December 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,301

 

 

$

14,198

 

Accounts receivable

 

 

3,272

 

 

 

4,200

 

Inventory

 

 

10,216

 

 

 

8,082

 

Deposits on purchased inventory

 

 

4,473

 

 

 

2,522

 

Deferred cost of revenue

 

 

6,250

 

 

 

3,909

 

Prepaid expenses and other current assets

 

 

4,698

 

 

 

3,023

 

Total current assets

 

 

78,210

 

 

 

35,934

 

Property and equipment, net

 

 

11,353

 

 

 

11,560

 

Restricted cash

 

 

1,143

 

 

 

1,143

 

Intangible assets, net

 

 

92

 

 

 

97

 

Other assets

 

 

30

 

 

 

30

 

TOTAL ASSETS

 

$

90,828

 

 

$

48,764

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,561

 

 

$

4,980

 

Accrued liabilities

 

 

6,322

 

 

 

6,334

 

Customer deposits

 

 

21,400

 

 

 

19,400

 

Deferred revenue, current portion

 

 

10,291

 

 

 

6,515

 

Total current liabilities

 

 

43,574

 

 

 

37,229

 

Deferred revenue, net of current portion

 

 

3,623

 

 

 

3,918

 

Long-term debt

 

 

44,368

 

 

 

44,290

 

Warrant liabilities

 

 

21,327

 

 

 

2,723

 

Other long-term liabilities

 

 

4,973

 

 

 

4,257

 

TOTAL LIABILITIES

 

 

117,865

 

 

 

92,417

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

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

   at March 31, 2017 and December 31, 2016; no shares issued and

   outstanding at March 31, 2017 and December 31, 2016

 

 

 

 

 

 

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

   March 31, 2017 and December 31, 2016; 56,086,583 and 43,581,184 shares

   issued and outstanding at March 31, 2017 and December 31, 2016

 

 

551

 

 

 

426

 

Additional paid-in capital

 

 

248,050

 

 

 

203,598

 

Accumulated deficit

 

 

(275,638

)

 

 

(247,677

)

TOTAL STOCKHOLDERS’ DEFICIT

 

 

(27,037

)

 

 

(43,653

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

90,828

 

 

$

48,764

 

 

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 March 31,

 

 

 

2017

 

 

2016

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

 

 

$

5,240

 

Service

 

 

1,108

 

 

 

216

 

Distribution rights

 

 

119

 

 

 

 

Total revenue

 

 

1,227

 

 

 

5,456

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

266

 

 

 

5,927

 

Service

 

 

776

 

 

 

601

 

Total cost of revenue

 

 

1,042

 

 

 

6,528

 

Gross margin

 

 

185

 

 

 

(1,072

)

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

2,914

 

 

 

3,399

 

Selling and marketing

 

 

1,072

 

 

 

1,279

 

General and administrative

 

 

7,151

 

 

 

6,320

 

Total operating expenses

 

 

11,137

 

 

 

10,998

 

Loss from operations

 

 

(10,952

)

 

 

(12,070

)

Interest income

 

 

1

 

 

 

1

 

Interest expense

 

 

(1,737

)

 

 

(1,082

)

Other income (expense), net

 

 

(15,273

)

 

 

(217

)

Loss before provision for income taxes

 

$

(27,961

)

 

$

(13,368

)

Provision for income taxes

 

 

 

 

 

 

Net loss

 

$

(27,961

)

 

$

(13,368

)

Net loss per share, basic and diluted

 

$

(0.54

)

 

$

(0.35

)

Weighted-average common shares used to compute net loss per

   share attributable to common stockholders, basic and diluted

 

 

51,821,422

 

 

 

38,211,439

 

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(27,961

)

 

$

(13,368

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

467

 

 

 

372

 

Stock-based compensation

 

 

769

 

 

 

556

 

Accretion on asset retirement obligation

 

 

9

 

 

 

9

 

Change in fair value of warrant liabilities

 

 

15,231

 

 

 

 

Loss on disposal of property and equipment

 

 

6

 

 

 

2

 

Inventory lower of cost or market adjustment

 

 

 

 

 

235

 

Amortization of debt discount and interest accrual

 

 

785

 

 

 

462

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

928

 

 

 

830

 

Inventory

 

 

(2,134

)

 

 

(4,261

)

Deposits on purchased inventory

 

 

(1,951

)

 

 

384

 

Deferred cost of revenue

 

 

(2,341

)

 

 

4,887

 

Prepaid expenses and other assets

 

 

(1,675

)

 

 

(43

)

Accounts payable

 

 

560

 

 

 

1,957

 

Accrued expenses and other long-term liabilities

 

 

(138

)

 

 

504

 

Customer deposits and deferred revenue

 

 

5,481

 

 

 

(3,016

)

Net cash used in operating activities

 

 

(11,964

)

 

 

(10,490

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(319

)

 

 

(4,456

)

Net cash used in investing activities

 

 

(319

)

 

 

(4,456

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from common stock private placement, gross

 

 

26,100

 

 

 

 

Payment of offering costs related to common stock private placement

 

 

(210

)

 

 

 

Proceeds from at-the-market offering of common stock, gross

 

 

21,921

 

 

 

 

Payment of offering costs related to at-the-market offering of common stock

 

 

(427

)

 

 

 

Proceeds from the exercise of stock options

 

 

2

 

 

 

8

 

Net cash provided by financing activities

 

 

47,386

 

 

 

8

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

35,103

 

 

 

(14,938

)

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD

 

 

14,198

 

 

 

20,667

 

CASH AND CASH EQUIVALENTS — END OF PERIOD

 

$

49,301

 

 

$

5,729

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

951

 

 

$

621

 

Cash paid for taxes

 

$

 

 

$

 

SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

135

 

 

$

932

 

Transfer of property and equipment from inventory

 

$

 

 

$

1,728

 

Offering cost in accounts payable and accrued expenses

 

$

394

 

 

$

 

 

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


7


VIEWRAY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.Background and Organization

ViewRay, Inc., or ViewRay or the Company, 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 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 with cobalt. In November 2013, ViewRay Technologies, Inc. received its first clinical acceptance of a MRIdian with cobalt 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 with cobalt in the European Union, or EU, since November 2014. In September 2016, the Company received the rights to affix the CE mark and in February 2017, the Company received 510(k) clearance from the FDA to market MRIdian Linac.

 

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 three months ended March 31, 2017, the Company incurred a net loss from operations of $28.0 million and used cash in operations of $12.0 million. The Company believes that its existing cash balance of $49.3 million as of March 31, 2017, which is largely made up of the aggregate $48.0 million of proceeds from the January 2017 private placement and equity issuances during the first quarter of 2017, is sufficient to provide liquidity to fund its 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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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, 2016.

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, 2016 filed with the SEC on March 17, 2017, 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, or 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 disclosure 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 No. 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 No. 2014-09. The Company currently expects to adopt the standard on January 1, 2018.

8


In December 2016, the Company initiated its evaluation of ASU No. 2014-09, including the expected impact on its business processes, systems and controls, and potential differences in the timing and/or method of revenue recognition for its sales contracts. Based on the initial assessment, the Company does not believe the adoption of ASU No. 2014-09 will have a material impact on the amount or timing of its revenue recognition. Due to the nature of the Company’s sales arrangements, product revenue, service revenue and distribution rights revenue are expected to remain substantially unchanged. The Company expects to select a transition method during the first half of 2017, and will continue its evaluation of ASU No. 2014-09 through the date of adoption.

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 disclosure 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 permitted. For the Company, the impact of ASU No. 2016-02 will primarily relate to its accounting and reporting of leases as a lessee. As disclosed in Note 6, future minimum payments under noncancelable operating leases are approximately $3.1 million. This new standard will require the present value of these leases to be recorded in the consolidated balance sheets as a right of use asset and lease liability. The Company is continuing to evaluate the impact of this guidance on its condensed 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. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU No. 2016-15 and ASU No. 2016-18 should be applied using the retrospective transition method, requiring adjustment to all comparative periods presented, 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 No. 2016-15 and ASU No. 2016-18 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 continuing to evaluate the impact of these updates on its condensed consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

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 adopted ASU No. 2015-11 as required in the first quarter of fiscal year 2017. The adoption of the new guidance did not have a material impact on its condensed consolidated financial reporting 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, application of award forfeitures to expense, 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 adopted ASU No. 2016-09 as required in the first quarter of fiscal year 2017, and there was no material impact on the financial statements given the full valuation allowance position of its deferred tax assets.

 

9


3.

Balance Sheet Components

Property and Equipment

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

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Prototype

 

$

11,929

 

 

$

6,405

 

Machinery and equipment

 

 

6,027

 

 

 

5,807

 

Leasehold improvements

 

 

4,621

 

 

 

4,621

 

Furniture and fixtures

 

 

368

 

 

 

368

 

Software

 

 

1,028

 

 

 

1,028

 

Construction in progress

 

 

 

 

 

5,498

 

Property and equipment, gross

 

 

23,973

 

 

 

23,727

 

Less: accumulated depreciation and amortization

 

 

(12,620

)

 

 

(12,167

)

Property and equipment, net

 

$

11,353

 

 

$

11,560

 

 

Depreciation and amortization expense related to property and equipment were $462 thousand, $326 thousand during the three months ended March 31, 2017 and 2016, respectively.

Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

License cost

 

$

512

 

 

$

512

 

Patents

 

 

104

 

 

 

104

 

Intangible assets, gross

 

 

616

 

 

 

616

 

Accumulated amortization

 

 

(524

)

 

 

(519

)

Intangible assets, net

 

$

92

 

 

$

97

 

 

Intangible assets amortization expense were $5 thousand and $46 thousand during the three months ended March 31, 2017 and 2016, respectively. Amortization of intangible assets was recorded in general and administrative expenses in the condensed consolidated statements of operations.

At March 31, 2017, the estimated future amortization expense of intangible assets was as follows (in thousands):

 

Year Ending December 31,

 

Estimated Future

Amortization

Expense

 

The remainder of 2017

 

$

14

 

2018

 

 

19

 

2019

 

 

19

 

2020

 

 

19

 

2021

 

 

10

 

2022

 

 

3

 

Thereafter

 

 

8

 

Total amortization expense

 

$

92

 

 

10


Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Accrued payroll and related benefits

 

$

4,154

 

 

$

4,274

 

Accrued accounts payable

 

 

940

 

 

 

1,202

 

Sales tax payable

 

 

39

 

 

 

13

 

Accrued legal, accounting and governance fees

 

 

693

 

 

 

509

 

Other

 

 

496

 

 

 

336

 

Total accrued liabilities

 

$

6,322

 

 

$

6,334

 

 

Deferred Revenue

Deferred revenue consisted of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Deferred revenue:

 

 

 

 

 

 

 

 

Product

 

$

8,550

 

 

$

5,050

 

Services

 

 

1,661

 

 

 

1,561

 

Distribution rights

 

 

3,703

 

 

 

3,822

 

Total deferred revenue

 

 

13,914

 

 

 

10,433

 

Less: current portion of deferred revenue

 

 

(10,291

)

 

 

(6,515

)

Noncurrent portion of deferred revenue

 

$

3,623

 

 

$

3,918

 

 

 

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 March 31, 2017 and December 31, 2016. Level 3 liabilities that are measured on a recurring basis consist of the 2016 and 2017 warrants for common stock issued in connection with the Company’s private placements. Placement warrant liabilities are 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. For the three months ended March 31, 2017, the Company recorded a loss of $15.2 million related to the change in fair value of the 2016 and 2017 placement warrants.  There have been no transfers between level one, level two and level three in any periods presented.

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

 

 

 

At March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

2017 Placement Warrants Liability

 

$

 

 

$

 

 

$

11,818

 

 

$

11,818

 

2016 Placement Warrants Liability

 

 

 

 

 

 

 

 

9,509

 

 

 

9,509

 

Total

 

$

 

 

$

 

 

$

21,327

 

 

$

21,327

 

 

 

 

At December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

2016 Placement Warrants Liability

 

$

 

 

$

 

 

$

2,723

 

 

$

2,723

 

 

11


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

 

 

 

Three Months

Ended

March 31, 2017

 

Fair value, beginning of period

 

$

2,723

 

Issuance of 2017 Placement Warrants

 

 

3,373

 

Change in fair value of Level 3 financial liabilities

 

 

15,231

 

Fair value, end of period

 

$

21,327

 

 

5.

Debt

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 March 31, 2017, 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.

At March 31, 2017, the Company was in compliance with all financial covenants under the CRG Term Loan.

In April 2017, the Company and CRG executed an amendment to the terms of its $50.0 million Term Loan Agreement, as amended in March 2016. Amendments to the CRG Term Loan agreement include availability of the existing $5.0 million tranche at ViewRay’s option through June 30, 2017, the addition of a $15.0 million tranche of borrowing capacity available at ViewRay’s option through September 30, 2017, extension of the interest-only and payment in-kind period, a decrease to the combined 2016 and 2017 revenue covenant and a 1.5% to 1.75% increase to the facility fee.

12


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 March 31, 2017, the future minimum payments for the operating leases are as follows (in thousands):

 

Year Ending December 31,

 

Future Minimum

Payments

 

The remainder of 2017

 

$

860

 

2018

 

 

1,188

 

2019

 

 

1,079

 

Total future minimum payments

 

$

3,127

 

 

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 March 31, 2017 and December 31, 2016, the Company was not involved in any material legal proceedings.

Purchase Commitments

At March 31, 2017 and December 31, 2016, the Company had no outstanding firm purchase commitments.

7.

Distribution Agreement

In December 2014, the Company entered into a distribution agreement with Itochu Corporation, or Itochu, a Japanese entity, pursuant to which the Company appointed Itochu as its exclusive distributor for the sale and delivery of the Company’s MRIdian products within Japan. 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 Itochu based upon the Company’s then-current pricing.  In consideration of the exclusive distribution rights granted, Itochu 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 Itochu 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. 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 $119 thousand for the three months ended March 31, 2017.  

8.

Equity Financing

Private Placements

In September 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 warrant holder the right to purchase 1,380,745 shares of common stock, or the 2016 Placement Warrants, and raised total gross proceeds of $13.8 million. The 2016 Placement Warrants have a per share exercise price of $2.95 per share, are exercisable at any time at the option of the holder and expire seven years from the date of issuance.

13


In January 2017, the Company entered into a Securities Purchase Agreement pursuant to which it sold an aggregate of 10,323,101 shares of common stock which consists of 8,602,589 shares of common stock and warrants to purchase 1,720,512 shares of common stock, or the 2017 Placement Warrants, for total gross proceeds of $26.1 million, or the 2017 Private Placement. The Company completed the closing of the 2017 Private Placement on January 18, 2017. The 2017 Placement Warrants have a per share exercise price of $3.17 per share, are exercisable after six months and expire seven years from the date of issuance.

At-The-Market Offering of Common Stock

In January 2017, the Company issued a base prospectus which covers the offering, issuance and sale by the registrant of up to a maximum aggregate offering price of $75.0 million of the registrant’s common stock, preferred stock, debt securities, warrants, purchase contracts and/or units; and the Company entered into a sales agreement with FBR Capital Markets & Co., or FBR, under which it may sell up to $25.0 million of its common shares pursuant to an at-the-market offering program in accordance with Rule 415(a)(4) under the Securities Act. FBR acted as sales agent on a best efforts basis and used commercially reasonable efforts to sell on behalf of the Company all of the shares of common stock requested to be sold by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between FBR and the Company. There is no arrangement for funds to be received in any escrow, trust or similar arrangement.

FBR is entitled to compensation of up to 3.0% of the gross sales price per share sold. In connection with the sale of the Company’s common stock on the Company’s behalf, FBR is deemed to be an “underwriter” within the meaning of the Securities Act and the compensation of FBR is deemed to be underwriting commissions or discounts. The Company has also agreed to provide indemnification and contribution to FBR with respect to certain liabilities, including liabilities under the Securities Act.

As of March 31, 2017, the Company sold 3,884,234 shares of its common stock at an average market price of $5.64 per share, resulting in aggregate gross proceeds of approximately $21.9 million.

9.

Warrants

Equity Classified Common Stock Warrants

At March 31, 2017 and December 31, 2016, the Company had warrants to purchase 128,231 shares of its common stock with an exercise price of $5.84 per share. These warrants were issued in connection with a debt financing in December 2013, and are exercisable any time at the option of the holder until December 16, 2023.

In connection with the merger of the Company and ViewRay Technologies, Inc. in July 2015, or the Merger, in July and August 2015, the Company conducted a private placement offering during which the Company issued warrants, or 2015 Placement Warrants, that provide the warrant holder the right to purchase 198,760 shares of common stock at an exercise price of $5.00 per share. These 2015 Placement Warrants are exercisable at any time at the option of the holder until the five year anniversary of its date of issuance.

All of these warrants remain outstanding at March 31, 2017 and December 31, 2016, and were accounted for as equity awards.

Liability Classified Common Stock Warrants

In connection with the 2016 Private Placement, in August and September 2016, the Company issued warrants, the 2016 Placement Warrants, that provide the warrant 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 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.  

14


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 months ended March 31, 2017, the Company recorded a loss of $6.8 million related to the change in fair value of the 2016 Placement Warrants.  The fair value of the 2016 Placement Warrants of $9.5 million was estimated using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

 

 

March 31, 2017

 

2016 Placement Warrant:

 

 

 

 

Expected term (in years)

 

 

6.4

 

Expected volatility

 

 

67.9%

 

Risk-free interest rate

 

 

2.2%

 

Expected dividend yield

 

 

0%

 

 

At March 31, 2017 and December 31, 2016 the 2016 Placement Warrants had not been exercised and were still outstanding.  

In connection with the 2017 Private Placement, in January 2017, the Company issued warrants, the 2017 Placement Warrants, that provide the warrant holder the right to purchase 1,720,512 shares of common stock at an exercise price of $3.17 per share. These 2017 Placement Warrants are exercisable after six months and expire seven years from the date of issuance. The 2017 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 in the 2017 Placement Warrants is defined the same way as for the 2016 Placement Warrants described above. The 2017 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 2017 Private Placement of $26.1 million was allocated first to the 2017 Placement Warrants based on its fair value upon issuance, and the residual was allocated to the common stock. The fair value upon issuance of $3.4 million for the 2017 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 62.9%, risk-free interest rate of 2.2% and expected dividend yield of 0%.

During the three months ended March 31, 2017, the Company recorded a loss of $8.4 million related to the change in fair value of the 2017 Placement Warrants. The fair value of the 2017 Placement Warrants of $11.8 million was estimated using the Black-Scholes option pricing model and the following weighted-average assumptions:

 

 

 

March 31, 2017

 

2017 Placement Warrant:

 

 

 

 

Expected term (in years)

 

 

6.8

 

Expected volatility

 

 

67.9%

 

Risk-free interest rate

 

 

2.2%

 

Expected dividend yield

 

 

0%

 

 

At March 31, 2017, the 2017 Placement Warrants had not been exercised and were still outstanding.  

15


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, 2016

 

 

2,168,391

 

 

 

6,127,291

 

 

$

2.60

 

 

 

7.3

 

 

$

7,800

 

Additional options authorized

 

 

1,743,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

(2,042,487

)

 

 

2,042,487

 

 

 

5.04

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

(559

)

 

 

3.00

 

 

 

 

 

 

 

 

 

Cancelled

 

 

7,361

 

 

 

(7,361

)

 

 

4.66

 

 

 

 

 

 

 

 

 

Balance at March 31, 2017

 

 

1,876,512

 

 

 

8,161,858

 

 

 

3.21

 

 

 

7.8

 

 

$

43,281

 

Vested and exercisable at March 31, 2017

 

 

 

 

 

 

3,906,790

 

 

$

1.77

 

 

 

6.3

 

 

$

26,345

 

Vested and expected to vest at March 31, 2017

 

 

 

 

 

 

7,800,566

 

 

$

3.15

 

 

 

7.7

 

 

$

41,818

 

 

The weighted-average grant date fair value of options granted to employees was $3.10 and $3.06 per share during the three months ended March 31, 2017 and 2016, respectively. The grant date fair value of options vested was $558 thousand and $444 thousand during the three months ended March 31, 2017 and 2016, 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. The aggregate intrinsic value of options exercised was insignificant during the three months ended March 31, 2017 and 2016, respectively. 

At March 31, 2017, total unrecognized compensation cost related to stock-based awards granted to employees, net of estimated forfeitures, was $10.3 million which is expected to be recognized over a weighted-average period of 3.3 years.

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, the Company’s common stock shares were listed on the OTC Bulletin Board. Beginning March 31, 2016, the Company’s 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.

16


Expected Volatility

As the Company has a limited trading history for its common stock, the expected stock price volatility for the Company’s common stock was estimated by taking a combination of the average historic price volatility of the Company’s common stock and 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:  

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Expected term (in years)

 

 

6.0

 

 

 

6.0

 

Expected volatility%

 

 

67.1%

 

 

 

69.8%

 

Risk-free interest rate%

 

 

2.1%

 

 

 

1.5%

 

Expected dividend yield%

 

 

0.0%

 

 

 

0.0%

 

 

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 had a grant date fair value of $3.58 per share, and were fully vested upon issuance and will be released and settled upon termination of the board services or the occurrence of a change in control event.

In December 2016, the Company granted 18,017 and 20,645 shares of RSUs to certain executive officers for bonus and one consultant for their service, respectively. These RSUs were fully vested upon issuance and the 18,017 shares of RSUs granted to certain executive officers were released during the three months ended March 31, 2017.

For the three months ended March 31, 2017, no additional RSUs were issued and no stock-based compensation expense related to RSUs was recorded in the accompanying condensed consolidated statements of operations.

17


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

March 31,

 

 

 

2017

 

 

2016

 

Research and development

 

$

165

 

 

$

121

 

Selling and marketing

 

 

51

 

 

 

24

 

General and administrative

 

 

553

 

 

 

411

 

Total stock-based compensation expense

 

$

769

 

 

$

556

 

 

During the three months ended March 31, 2017 and 2016, 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 ended March 31, 2017 and 2016.

11.

Income Tax

Due to the current operating losses, the Company recorded zero income tax expense during the three months ended March 31, 2017 and 2016, respectively. 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. The federal and state effective tax rate is approximately 35%.  

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 March 31, 2017. 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 $1.2 million and $940 thousand at March 31, 2017 and December 31, 2016, 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.  

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense. At March 31, 2017 and 2016, there were no accrued interest and penalties related to uncertain tax positions.  

12.

Net Loss per Share

Since the Company was in a loss position for all periods presented, diluted net loss per common share is the same as basic net loss per common share for all periods presented, because the inclusion of all potential common shares outstanding would have an anti-dilutive effect. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share for the periods presented, because including them would have an anti-dilutive effect:

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Options to purchase common stock

 

 

7,117,452

 

 

 

6,063,836

 

Common stock warrants

 

 

3,103,262

 

 

 

326,991

 

Restricted stock units

 

 

112,578

 

 

 

 

Total

 

 

10,333,292

 

 

 

6,390,827

 

 

18


13.

Related Party Transactions

In December 2004, the Company entered into a licensing agreement with the University of Florida Research Foundation, or UFRF, whereby UFRF granted the Company a worldwide exclusive license to certain of UFRF’s patents in exchange for 33,652 shares of common stock and a 1% royalty from sales of products developed and sold by the Company utilizing the licensed patents.  

In January 2017, the Company entered into a sales consulting agreement with Puissance Capital Management, or PCM, to assist with business development activities in a key market in Asia. PCM is the investment manager of the Puissance Cross-Border Opportunities I LP, a stockholder in the Company. Theodore T. Wang, Ph.D., a member of the Company’s board of directors, is the managing member of the general partners of PCM. The sales consulting agreement has a term of one year with a total consideration of $1.3 million.

14.

Segment and Geographic Information

The Company has one business activity, which is radiation therapy technology combined with magnetic resonance imaging, and operates in one reportable segment. The Company’s chief operating decision-maker, its chief executive officer, reviews its operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance. Also, the Company does not have segment managers as the Company manages its operations as a single operating segment.

15.

Subsequent Events

In April 2017, the Company and CRG executed an amendment to the terms of the CRG Term Loan (see Note 5).

In April and May 2017, the Company sold approximately 1.1 million shares of its common stock through its at-the-market offering program. The shares had an average market price of $7.04 per share, resulting in aggregate net proceeds of approximately $7.4 million.

 

 

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2016, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report filed with the SEC on March 17, 2017. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in this Quarterly Report that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements.

Unless otherwise indicated, references in this section to “ViewRay,” “we,” “us,” “our” and “the Company” refer to ViewRay, Inc. and its consolidated subsidiary, ViewRay Technologies, Inc.

As a result of the merger of the Company and ViewRay Technologies, Inc. in July 2015, or the Merger, and the change in business and operations of the Company, a discussion of the past financial results of the Company is not pertinent, and under applicable accounting principles the historical financial results of ViewRay Technologies, Inc., the accounting acquirer, prior to the Merger are considered the historical financial results of the Company.

The following discussion highlights ViewRay’s results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on ViewRay’s unaudited condensed consolidated financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such condensed consolidated financial statements and the related notes thereto.

Company Overview

We design, manufacture and market MRIdian, the first and only MRI-guided radiation therapy system to simultaneously image and treat cancer patients. 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 with cobalt in May 2012. We also received permission to affix the Conformité Européene, or CE, mark to MRIdian with cobalt in November 2014, allowing MRIdian with cobalt to be sold within the European Economic Area. In August 2016, we received regulatory approval from the Japanese Ministry of Health, Labor and Welfare to market MRIdian with cobalt in Japan. In August 2016, we also received approval from the China Food and Drug Administration to market MRIdian with cobalt in China. In September 2016, we received CE mark approval of MRIdian Linac in the EU. In February 2017, we received 510(k) clearance from the FDA to market MRIdian Linac.

MRIdian is a radiation therapy solution that enables treatment and real-time imaging of a patient’s anatomy simultaneously. The high-quality images that it generates 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 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 45 different types of cancer, as well as patients for whom radiation therapy was previously not an option.

20


At March 31, 2017, we have installed MRIdian with cobalt systems at seven cancer centers located at Washington University in St. Louis; University of California, Los Angeles; University of Wisconsin—Madison; Sylvester Comprehensive Cancer Center at the University of Miami; Seoul National University in South Korea; VU University Medical Center in the Netherlands and Policlinico “A. Gemelli” Hospital in Italy. Two other MRIdian with cobalt systems have been delivered and are expected to be installed in 2017 and early 2018, respectively, at National Cancer Center in Japan and Edogawa Hospital in Japan.

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. After the customer completes their customization, it typically takes forty-five to ninety days for us to install MRIdian and perform on-site testing of the system, including the completion of acceptance test procedures.

We generated product, service and distribution rights revenue of $1.2 million and $5.5 million, and had net losses of $28.0 million and $13.4 million during the three months ended March 31, 2017 and 2016, respectively. At March 31, 2017, we had backlog with a total value of $144.9 million.

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:

 

add personnel to support our product development and commercialization efforts;

 

continue our research and development efforts;

 

seek regulatory approval for MRIdian in certain foreign countries;

 

operate as a public company.

Accordingly, we may seek to fund our operations through public or private equity, debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop enhancements to and integrate new technologies into MRI-guided radiation therapy systems.

New Orders and Backlog

New orders are defined as the sum of gross product orders, representing MRIdian contract price, recorded during the period. We define backlog as the accumulation of all orders for which revenue has not been recognized and we consider valid. Backlog includes customer deposits or letters of credit, except when the product order is to a government entity or when the product order is from an existing customer with credit to cover the deposit. Deposits received 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. The determination of backlog includes objective and subjective judgment about the likelihood of an order contract becoming revenue. We perform a quarterly review of backlog to verify that outstanding orders in backlog remain valid, and based upon this review, orders that are no longer expected to result in revenue are removed from backlog. Among other criteria, to consider a transaction to be in backlog we must possess an outstanding and effective written agreement for the delivery of a MRIdian signed by a customer and receipt of a minimum customer deposit or a letter of credit except when the product order is to a government entity or when the product order is from an existing customer with credit to cover the deposit. For removal of an order from our backlog, the following criteria are considered: any changes in customer or distributor plans or financial conditions; the customer’s or distributor’s continued intent and ability to fulfill the order contract; changes to regulatory requirements; the status of regulatory approval required in the customer’s jurisdiction, if any; and other reasons for potential cancellation of order contracts.

During the three months ended March 31, 2017, we received new orders for MRIdian systems, totaling $12.3 million. At March 31, 2017, we had backlog with a total value of $144.9 million.

21


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 forty-five to ninety days 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 concurrently 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.

Revenue recognition for MRIdian systems that we install generally occurs when the customer acknowledges that the system operates in accordance with standard product specifications, the customer accepts the installed unit and title and risk of loss are transferred to the customer. For sales of MRIdian systems that we are not responsible for installation, revenue is recognized when the entire system is delivered and title and risk of loss are transferred to the customer.

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 and labor, and preventative maintenance to labor only with a longer response time. We also offer technology upgrades to our MRIdian systems, when and if available, for an additional fee. Service revenue is recognized on a straight-line basis over the term during which the contracted services are provided.

Distribution Rights Revenue.  We entered into a distribution agreement with Itochu Corporation pursuant to which we appointed Itochu as our exclusive distributor for the promotion, sale and delivery of MRIdian products within Japan. In consideration of the exclusive distribution rights granted, we received $4.0 million, which was recorded as deferred revenue and starting in August 2016 was recognized as distribution rights revenue on a straight-line basis over the remaining term of the distribution agreement of approximately 8.5 years. 

Cost of Revenue

Product Cost of Revenue. Product cost of revenue primarily consists of the cost of materials, installation and services associated with the manufacturing and installation of MRIdian systems, 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 initially sold our MRIdian systems prior to December 31, 2015 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 a LCM charge of $0.2 million for the three months ended March 31, 2016. There was no LCM charge for the three months ended March 31, 2017.

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. We expect to continue to lower costs and increase sales prices as we transition to MRIdian Linac.  

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.

22


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 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 our research and development expenses to increase.

Selling and Marketing. Selling and marketing expenses consist primarily of compensation and related costs for our direct sales force, sales management, and marketing and customer support personnel, and include stock-based compensation, employee benefits and travel expenses. Selling and marketing expenses also include costs related to trade shows and marketing programs. We expense selling and marketing costs as incurred. We expect selling and marketing expenses to increase in future periods as we expand our sales force and our marketing and customer support organizations 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 our operations, finance, human resources, regulatory, and other administrative personnel, and include stock-based compensation, employee benefits and travel expenses. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, quality and regulatory functions and facilities costs, and gain or loss on the disposal of property and equipment. We expect our general and administrative expenses to increase as our business grows and as we invest in the development of MRIdian Linac.

Interest Income

Interest income consists primarily of interest income received on our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of interest and amortization related to our long-term debt entered in 2015 from Capital Royalty 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, and such loan the CRG Term Loan.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency exchange gains and losses and changes in the fair value of the 2017 and 2016 Placement Warrants.

The outstanding 2017 and 2016 Placement Warrants are re-measured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as a component of other income (expense), net.  

23


Results of Operations

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

 

 

$

5,240

 

Service

 

 

1,108

 

 

 

216

 

Distribution rights

 

 

119

 

 

 

 

Total revenue

 

 

1,227

 

 

 

5,456

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

266

 

 

 

5,927

 

Service

 

 

776

 

 

 

601

 

Total cost of revenue

 

 

1,042

 

 

 

6,528

 

Gross margin

 

 

185

 

 

 

(1,072

)

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

2,914

 

 

 

3,399

 

Selling and marketing

 

 

1,072

 

 

 

1,279

 

General and administrative

 

 

7,151

 

 

 

6,320

 

Total operating expenses:

 

 

11,137

 

 

 

10,998

 

Loss from operations

 

 

(10,952

)

 

 

(12,070

)

Interest income

 

 

1

 

 

 

1

 

Interest expense

 

 

(1,737

)

 

 

(1,082

)

Other income (expense), net

 

 

(15,273

)

 

 

(217

)

Loss before provision for income taxes

 

 

(27,961

)

 

 

(13,368

)

Provision for income taxes

 

 

 

 

 

 

Net loss

 

$

(27,961

)

 

$

(13,368

)

 

Comparison of the Three Months Ended March 31, 2017 and 2016

Revenue

 

 

 

Three Months Ended

March 31,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change

 

 

 

(in thousands)

 

 

 

 

 

Product

 

$

 

 

$

5,240

 

 

$

(5,240

)

Service