Quarterly Report (10-q)

Date : 11/06/2019 @ 10:29PM
Source : Edgar (US Regulatory)
Stock : Accuray Incorporated (ARAY)
Quote : 2.85  0.09 (3.26%) @ 4:44PM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

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: 001-33301

 

ACCURAY INCORPORATED

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

20-8370041

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification Number)

 

1310 Chesapeake Terrace

Sunnyvale, California 94089

(Address of Principal Executive Offices Including Zip Code)

 

(408) 716-4600

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.001 par value per share

ARAY

The Nasdaq Stock Market LLC

 

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 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

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 November 1, 2019, there were 89,024,611 shares of the Registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

Page No.

 

 

 

PART I.

Financial Information

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

3

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2019 and 2018

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three months ended September 30, 2019 and 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2019 and 2018

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

Item 3.

Defaults Upon Senior Securities

59

 

 

 

Item 4.

Mine Safety Disclosures

59

 

 

 

Item 5.

Other Information

59

 

 

 

Item 6.

Exhibits

60

 

 

 

Signatures

 

61

 

We own or have rights to various trademarks and tradenames used in our business in the United States or other countries, including the following: Accuray®, Accuray Logo®, CyberKnife®, Hi‑Art®, RayStation®, RoboCouch®, Synchrony®, TomoTherapy®, Xsight®, Accuray Precision®, AutoSegmentation™, CTrue™, H™ Series, iDMS®, InCise™, Iris™, M6™ Series, OIS Connect™, PlanTouch®, PreciseART®, PreciseRTX®, Treatment Planning System™, QuickPlan®, TomoDirect™, TomoEdge™, TomoH®, TomoHD®, TomoHDA™, TomoHelical™, Tomo Quality Assurance™, Radixact®, Onrad ™, StatRT™, and VoLO™. ImagingRing® is a registered trademark belonging to medPhoton GmbH. RayStation® is a registered trademark belonging to RaySearch Laboratories, AB.

2


 

PART I.  FINANCIAL INFORMATION

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

Accuray Incorporated

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share amounts and par value)

 

 

 

September 30,

2019

 

 

June 30,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,911

 

 

$

76,798

 

Restricted cash

 

 

5,751

 

 

 

10,218

 

Accounts receivable, net of allowance for doubtful accounts of $625 and

   $605 as of September 30, 2019 and June 30, 2019, respectively (a)

 

 

104,684

 

 

 

111,885

 

Inventories

 

 

129,233

 

 

 

120,823

 

Prepaid expenses and other current assets

 

 

20,500

 

 

 

24,205

 

Deferred cost of revenue

 

 

148

 

 

 

146

 

Total current assets

 

 

341,227

 

 

 

344,075

 

Property and equipment, net

 

 

16,682

 

 

 

17,122

 

Operating lease right-of-use assets, net

 

 

28,864

 

 

 

 

Goodwill

 

 

57,657

 

 

 

57,770

 

Intangible assets, net

 

 

643

 

 

 

679

 

Restricted cash

 

 

1,226

 

 

 

1,162

 

Other assets

 

 

17,448

 

 

 

17,373

 

Total assets

 

$

463,747

 

 

$

438,181

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

23,621

 

 

$

29,562

 

Accrued compensation

 

 

21,578

 

 

 

31,150

 

Operating lease liabilities, current

 

 

7,092

 

 

 

 

Other accrued liabilities

 

 

25,847

 

 

 

32,742

 

Customer advances

 

 

18,413

 

 

 

20,395

 

Deferred revenue

 

 

79,596

 

 

 

78,332

 

Total current liabilities

 

 

176,147

 

 

 

192,181

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Operating lease liabilities, non-current

 

 

25,549

 

 

 

 

Long-term other liabilities

 

 

6,344

 

 

 

9,646

 

Deferred revenue

 

 

26,273

 

 

 

26,639

 

Long-term debt

 

 

188,460

 

 

 

159,844

 

Total liabilities

 

 

422,773

 

 

 

388,310

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; authorized: 200,000,000 shares as of

   September 30, 2019 and June 30, 2019, respectively; issued and

   outstanding: 88,578,510 and 88,521,511 shares at September 30, 2019 and

   June 30, 2019, respectively

 

 

89

 

 

 

89

 

Additional paid-in-capital

 

 

536,809

 

 

 

535,332

 

Accumulated other comprehensive loss

 

 

(1,028

)

 

 

(10

)

Accumulated deficit

 

 

(494,896

)

 

 

(485,540

)

Total stockholders' equity

 

 

40,974

 

 

 

49,871

 

Total liabilities and stockholders' equity

 

$

463,747

 

 

$

438,181

 

 

 

(a)

Includes accounts receivable from joint venture of $3,438 and $0 at September 30, 2019 and June 30, 2019, respectively. See Note 14.

 

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

3


 

Accuray Incorporated

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except per share amounts)

 

 

 

Three Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Net revenue:

 

 

 

 

 

 

 

 

Products

 

$

37,605

 

 

$

41,517

 

Services

 

 

51,972

 

 

 

54,312

 

Total net revenue (a)

 

 

89,577

 

 

 

95,829

 

Cost of revenue:

 

 

 

 

 

 

 

 

Cost of products

 

 

21,570

 

 

 

24,524

 

Cost of services

 

 

35,064

 

 

 

33,426

 

Total cost of revenue (b)

 

 

56,634

 

 

 

57,950

 

Gross profit

 

 

32,943

 

 

 

37,879

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

13,341

 

 

 

13,889

 

Selling and marketing

 

 

13,266

 

 

 

13,036

 

General and administrative

 

 

10,616

 

 

 

15,642

 

Total operating expenses

 

 

37,223

 

 

 

42,567

 

Loss from operations

 

 

(4,280

)

 

 

(4,688

)

Other expense, net

 

 

(4,439

)

 

 

(3,983

)

Loss before provision for income taxes

 

 

(8,719

)

 

 

(8,671

)

Provision for income taxes

 

 

637

 

 

 

535

 

Net loss

 

$

(9,356

)

 

$

(9,206

)

Net loss per share - basic and diluted

 

$

(0.11

)

 

$

(0.11

)

Weighted average common shares used in computing net loss per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

88,772

 

 

 

86,479

 

Net loss

 

$

(9,356

)

 

$

(9,206

)

Foreign currency translation adjustment

 

 

(1,018

)

 

 

(395

)

Comprehensive loss

 

$

(10,374

)

 

$

(9,601

)

 

 

(a)

Includes sales to joint venture of $3,817 and $0 for the three months ended September 30, 2019 and 2018, respectively. See Note 14.

 

(b)

Includes cost of revenue from sales to joint venture of $2,491 and $0 for the three months ended September 30, 2019 and 2018, respectively. See Note 14.

 

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

4


 

Accuray Incorporated

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

Income /

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss)

 

 

Deficit

 

 

Equity

 

Balance at June 30, 2018

 

 

86,129,256

 

 

$

86

 

 

$

521,738

 

 

$

1,093

 

 

$

(474,285

)

 

$

48,632

 

Exercise of stock options, net

 

 

3,500

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

Issuance of restricted stock

 

 

367,504

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

2,947

 

 

 

 

 

 

 

 

 

2,947

 

Adoption of new revenue recognition

   standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,114

 

 

 

5,114

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,206

)

 

 

(9,206

)

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(395

)

 

 

 

 

 

(395

)

Balance at September 30, 2018

 

 

86,500,260

 

 

$

86

 

 

$

524,699

 

 

$

698

 

 

$

(478,377

)

 

$

47,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

88,521,511

 

 

$

89

 

 

$

535,332

 

 

$

(10

)

 

$

(485,540

)

 

$

49,871

 

Issuance of restricted stock

 

 

356,999

 

 

 

 

 

 

(207

)

 

 

 

 

 

 

 

 

(207

)

Share-based compensation

 

 

 

 

 

 

 

 

1,684

 

 

 

 

 

 

 

 

 

1,684

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,356

)

 

 

(9,356

)

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(1,018

)

 

 

 

 

 

(1,018

)

Balance at September 30, 2019

 

 

88,878,510

 

 

$

89

 

 

$

536,809

 

 

$

(1,028

)

 

$

(494,896

)

 

$

40,974

 

 

5


 

Accuray Incorporated

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(9,356

)

 

$

(9,206

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,865

 

 

 

2,129

 

Share-based compensation

 

 

1,700

 

 

 

3,212

 

Amortization of debt issuance costs

 

 

329

 

 

 

380

 

Accretion of interest on debt

 

 

965

 

 

 

811

 

Provision for bad debt

 

 

22

 

 

 

3,737

 

Provision for write-down of inventories

 

 

992

 

 

 

713

 

Loss on disposal of property and equipment

 

 

 

 

19

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,785

 

 

 

(1,377

)

Inventories

 

 

(10,479

)

 

 

(10,150

)

Prepaid expenses and other assets

 

 

2,049

 

 

 

(1,096

)

Deferred cost of revenue

 

 

(2

)

 

 

459

 

Accounts payable

 

 

(5,704

)

 

 

6,256

 

Operating lease liabilities, net

 

 

(82

)

 

 

 

Accrued liabilities

 

 

(14,086

)

 

 

(8,564

)

Customer advances

 

 

(1,707

)

 

 

(3,723

)

Deferred revenues

 

 

2,088

 

 

 

(1,423

)

Net cash used in operating activities

 

 

(24,621

)

 

 

(17,823

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment, net

 

 

(1,267

)

 

 

(1,602

)

Net cash used in investing activities

 

 

(1,267

)

 

 

(1,602

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from employee stock plans

 

 

 

 

837

 

Taxes paid related to net share settlement of equity awards

 

 

(207

)

 

 

 

Proceeds from debt, net of costs

 

 

24,716

 

 

 

Borrowings (repayments) under Revolving Credit Facility, net

 

 

2,941

 

 

 

(3,263

)

Net cash provided by (used in) financing activities

 

 

27,450

 

 

 

(2,426

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(1,852

)

 

 

(377

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(290

)

 

 

(22,228

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

88,178

 

 

 

93,533

 

Cash, cash equivalents and restricted cash at end of period

 

$

87,888

 

 

$

71,305

 

 

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

6


 

Accuray Incorporated

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 1. The Company and its Significant Accounting Policies

The Company

 

Accuray Incorporated (together with its subsidiaries, the “Company” or “Accuray”) designs, develops and sells advanced radiosurgery and radiation therapy systems for the treatment of tumors throughout the body. The Company is incorporated in Delaware and has its principal place of business in Sunnyvale, California. The Company has primary offices in the United States, Switzerland, China, Hong Kong and Japan and conducts its business worldwide.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the periods presented. The results for the three months ended September 30, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2020, or for any other future interim period or fiscal year.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the fiscal year ended June 30, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 23, 2019.

Significant Accounting Policies

 

Other than the recent accounting pronouncements adopted and discussed below under Accounting Pronouncements Recently Adopted, there have been no changes in the Company’s significant accounting policies during the three months ended September 30, 2019 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

 

Note 2. Recent Accounting Pronouncements

Accounting Pronouncement Recently Adopted

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging. This guidance simplifies the application and administration of hedge accounting. The guidance amends the presentation and disclosure requirements and changes how companies assess effectiveness. The guidance is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance was effective for the Company in the first quarter of fiscal 2020 and was adopted on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets.  The Company adopted Topic 842 using the current period adjustment method as of July 1, 2019 and elected the transition option that allows the Company not to restate the comparative periods in its financial statements in the year of adoption. As a result, the Company had not changed previously disclosed amounts or provided additional disclosures for comparative periods. As of July 1, 2019 the right-of-use assets was $30.6 million and the respective lease liability was $34.5 million. The difference between the total right-of-use assets and total lease liabilities recorded as of July 1, 2019 is primarily due to the derecognition of deferred rent liabilities that were included in “Accrued expenses and other current liabilities” and “Other long-term liabilities,” respectively, in the consolidated balance sheet as of June 30, 2019. The Company also elected the package of transition expedients available for expired or existing contracts, which allowed the Company to carryforward its historical assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company elected to account for lease and non-lease components in its facility and car leases as a single lease component. As a policy election, for leases that, at commencement date, have a lease term of 12 months or less, the Company records expenses as incurred and does not recognize right-of-use assets and lease liabilities.

 

7


 

The Company determines if an arrangement is or contains a lease at inception by evaluating various factors, including whether a vendor’s right to substitute an identified asset is substantive. Payments under its lease arrangements are primarily fixed, however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease assets and liabilities. Lease classification is determined at the lease commencement date, on which the leased assets are made available for its use. Operating leases are included in “Operating lease right-of-use assets,” “Current portion of operating lease liabilities,” and “Operating lease liabilities, less current portion” in the condensed consolidated balance sheets. The Company did not have any financing leases in any of the periods presented.

 

Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.  Lease payments consist primarily of the fixed payments under the arrangement, less any lease incentives such as rent holidays. The Company uses an estimate of its incremental borrowing rate (IBR) based on the information available at the lease commencement date in determining the present value of lease payments, unless the implicit rate is readily determinable. In determining the appropriate IBR, the Company considers information including, but not limited to, its credit rating and the lease term. For leases which commenced prior to the adoption of Topic 842, the Company used the IBR on July 1, 2019. For each lease transaction which include a renewal option, Management needs to determine if it is reasonably certain to exercise it. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows companies to reclassify from Accumulated Other Comprehensive Income to Retained Earnings stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the "Tax Act"). The Company adopted ASU No. 2018‑02 as required in the first quarter of fiscal year 2020. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.

 

Accounting Pronouncements Not Yet Effective

 

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) to clarify revenue accounting for collaborative arrangements entered into with customers. The standard is effective for the Company beginning in the first quarter of fiscal year 2021 and will be applied retrospectively to the date of the initial application of ASC 606. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard requires capitalized costs to be amortized on a straight-line basis generally over the term of the arrangement, and the financial statement presentation for these capitalized costs would be the same as that of the fees related to the hosting arrangements. The guidance will be effective for the Company in its first quarter of fiscal 2021. Early adoption is permitted.This standard can be adopted either on retrospective or prospective basis. The Company has not yet decided whether it will early adopt and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13 Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires measurement and recognition of expected credit losses for financial assets held. This guidance will be effective for the Company in the first quarter of fiscal 2021 and must be adopted using a modified retrospective approach, with certain exceptions. Early adoption is permitted beginning in the first quarter of fiscal 2020. The Company is evaluating whether it will early adopt and is currently assessing the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

8


 

Note 3. Revenue

  

Contract Balances

 

The Company offers payment terms of more than one year for qualified customers and transactions in some circumstances. At times, revenue recognition occurs before billing, resulting in an unbilled receivable, which represents a contract asset. The contract asset is a component of accounts receivable and other assets for the current and non-current portions, respectively.

 

Customer advances represent deposits from customers for shipments of systems. Deferred revenue balances represent active and non-active warranties and services, which are recognized based on contract terms.

 

Changes in the contract assets and contract liabilities are as follows:

 

 

 

September 30,

2019

 

 

June 30,

2019

 

(Dollars in thousands)

 

Amount

 

 

Amount

 

Contract Assets:

 

 

 

 

 

 

 

 

Unbilled accounts receivable – current (1)

 

$

7,643

 

 

$

5,260

 

Interest receivable – current (2)

 

 

584

 

 

 

361

 

Long-term accounts receivable (2)

 

 

3,081

 

 

 

4,116

 

Interest receivable – non-current (2)

 

 

1,079

 

 

 

1,255

 

Contract Liabilities:

 

 

 

 

 

 

 

 

Customer advances

 

 

18,413

 

 

 

20,395

 

Deferred revenue – current

 

 

79,596

 

 

 

78,332

 

Deferred revenue – non-current

 

 

26,273

 

 

 

26,639

 

 

 

(1)

Included in accounts receivable on consolidated balance sheets

 

(2)

Included in prepaid expenses and other current assets on consolidated balance sheets

 

(3)

Included in other assets on consolidated balance sheets

 

During the quarter ended September 30, 2019, contract assets changed primarily due to the timing of billings occurring after revenues were recognized and payment terms exceeding 12 months. Contract liabilities changed due to timing of system sales for which the warranty has not yet started and was deferred and due to changes in transaction price.

 

Changes in deferred revenue from contracts with customers are as follows:

 

 

 

Three Months Ended

 

(Dollars in thousands)

 

September 30,

2019

 

 

June 30,

2019

 

Balance at beginning of period

 

$

104,971

 

 

$

102,124

 

New billings

 

 

90,475

 

 

 

120,263

 

Recognition of deferred revenue from opening balance

 

 

(11,191

)

 

 

(22,619

)

Recognition of new additions

 

 

(78,386

)

 

 

(94,797

)

Balance at end of period

 

$

105,869

 

 

$

104,971

 

 

Remaining Performance Obligations

 

Remaining performance obligations represent deferred revenue from open contracts for which performance has already started and the transaction price from executed and non-cancellable contracts for which performance has not yet started. Service contracts in general are considered month-to-month contracts, and therefore, the Company has elected the practical expedients to not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

 

As of September 30, 2019, total remaining performance obligations amounted to $881.1 million. Of this total amount, $82.3 million related to long-term warranty and service, which is expected to be recognized over the remaining warranty period for systems that have been delivered. For systems that have been delivered but not yet installed, management estimates the timing of installation since warranty starts upon installation.

 

9


 

The following table represents the Company's remaining performance obligations related to long-term warranty and service as of September 30, 2019 and the estimated revenue expected to be recognized:

 

 

 

Fiscal years of revenue recognition

 

(Dollars in thousands)

 

2020

 

 

2021

 

 

2022

 

 

Thereafter

 

Long-term warranty and service

 

$

28,619

 

 

$

26,649

 

 

$

14,714

 

 

$

12,332

 

 

For the remaining $798.8 million of performance obligations, the Company estimates 21% to 30% will be recognized in the next 12 months, and the remaining 70% to 79% will be recognized in the 30 months thereafter. The Company’s historical experience indicates that some of its customers will cancel or renegotiate contracts as economic conditions change or when product offerings change during the long sales cycle. Based on historical cancellations, about 24% of the Company’s contracts may never result in revenue due to cancellation.

 

The time bands reflect management’s best estimate of when the Company will transfer control to the customer and may change based on timing of shipment, readiness of customers’ facilities for installation, installation requirements, and availability of products.

 

Capitalized Contract Costs

 

The Company capitalizes and amortizes the incremental costs of obtaining a contract, primarily related to certain bonuses and sales commissions. The capitalized bonuses and sales commissions are amortized over a period of five years commencing upon the initial transfer of control of the system to the customer following the pattern of transfer of control of the performance obligations to the customer.

 

The balance of capitalized costs to obtain a contract was $8.7 million and $6.2 million as of September 30, 2019 and 2018, respectively. The Company has classified the capitalized costs to obtain a contract as a component of prepaid expenses and other current assets and other assets with respect to the current and non-current portions of capitalized costs, respectively, on the consolidated balance sheets. The Company incurred impairment losses of $0.1 million and $0 in the three-month periods ended September 30, 2019 and 2018, respectively. The Company recognized $0.5 million and $0.9 million in expense related to the amortization of the capitalized contract costs during the three-month periods ended September 30, 2019 and 2018, respectively .

 

Note 4. Supplemental Financial Information

 

Balance Sheet Components

 

Financing receivables

 

A financing receivable is a contractual right to receive money, on demand or on fixed or determinable dates, that is recognized as an asset on the Company’s balance sheet. The Company’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year, totaled $3.1 million and $4.3 million at September 30, 2019 and June 30, 2019, respectively, and are included in other assets in the unaudited condensed consolidated balance sheets. The Company evaluates the credit quality of an obligor at contract inception and monitors it over the term of the underlying transactions. The Company performs a credit analysis for all new customers and reviews payment history, current order backlog, financial performance of the customers and other variables that augment or mitigate the inherent credit risk of a transaction. The Company classifies accounts as high risk when it considers the financing receivable to be impaired or when management believes there is a significant near-term risk of non-payment. The Company performed an assessment of the allowance for credit losses related to its financing receivables as of September 30, 2019 and June 30, 2019. Based upon such assessment, the Company had recorded adjustments of $3.6 and $3.6 to the allowance for credit losses related to such financing receivables as of September 30, 2019 and as of June 30, 2019, respectively.

10


 

A summary of the Company’s financing receivables is presented as follows (in thousands):

 

September 30, 2019

 

Financed

Service Contracts

and Other

 

Gross

 

$

12,551

 

Residual value

 

 

 

Unearned income

 

 

(1,498

)

Allowance for credit loss

 

 

(3,582

)

Total, net

 

$

7,471

 

Reported as:

 

 

 

 

Current

 

$

4,298

 

Non-current

 

 

3,173

 

Total, net

 

$

7,471

 

 

June 30, 2019

 

Financed

Service Contracts

and Other

 

Gross

 

$

13,288

 

Residual value

 

 

 

Unearned income

 

 

(1,535

)

Allowance for credit loss

 

 

(3,582

)

Total, net

 

$

8,171

 

Reported as:

 

 

 

 

Current

 

$

3,902

 

Non-current

 

 

4,269

 

Total, net

 

$

8,171

 

 

Inventories

Inventories consisted of the following (in thousands):

 

 

 

September 30,

2019

 

 

June 30,

2019

 

Raw materials

 

$

48,754

 

 

$

40,966

 

Work-in-process

 

 

19,509

 

 

 

18,152

 

Finished goods

 

 

60,970

 

 

 

61,705

 

Inventories

 

$

129,233

 

 

$

120,823

 

 

Property and equipment, net

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

 

 

 

September 30,

2019

 

 

June 30,

2019

 

Furniture and fixtures

 

$

2,714

 

 

$

2,728

 

Computer and office equipment

 

 

11,202

 

 

 

11,183

 

Software

 

 

11,403

 

 

 

11,236

 

Leasehold improvements

 

 

25,755

 

 

 

25,741

 

Machinery and equipment

 

 

45,990

 

 

 

45,472

 

Construction in progress

 

 

1,556

 

 

 

1,658

 

 

 

 

98,620

 

 

 

98,018

 

Less: Accumulated depreciation

 

 

(81,938

)

 

 

(80,896

)

Property and equipment, net

 

$

16,682

 

 

$

17,122

 

 

11


 

Depreciation expense related to property and equipment for the three months ended September 30, 2019 and 2018 was $1.8 million and $2.1 million, respectively.

Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss are excluded from earnings and reported as a component of stockholders’ equity. The foreign currency translation adjustment results from those subsidiaries not using the U.S. Dollar as their functional currency since the majority of their economic activities are primarily denominated in their applicable local currency. Accordingly, all assets and liabilities related to these operations are translated to the U.S. Dollar at the current exchange rates at the end of each period. Revenues and expenses are translated at average exchange rates in effect during the period.

The components of accumulated other comprehensive loss in the equity section of the balance sheets are as follows (in thousands):

 

 

 

September 30,

2019

 

 

June 30,

2019

 

Cumulative foreign currency translation adjustment

 

$

(28

)

 

$

990

 

Defined benefit pension obligation

 

 

(1,000

)

 

 

(1,000

)

Accumulated other comprehensive loss

 

$

(1,028

)

 

$

(10

)

 

 

Note 5. Leases

 

The Company has operating leases for corporate offices and warehouse facilities worldwide. Additionally, the Company leases cars, copy machines and laptops through various operating leases. For some leases the Company has entered into non-cancelable operating lease agreements with various expiration dates through June 2025. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into the determination of lease payments.

 

Operating lease costs for the three months ended September 30, 2019 was $2.3 million, not including short-term operating lease costs, which were not material.  

 

For the three months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities was approximately $2.3 million,and operating lease liabilities arising from obtaining operating right-of-use assets totaled $0.2 million. 

 

Maturities of operating lease liabilities as of September 30, 2019 are presented in the table below (in thousands):

 

Year Ending June 30,

 

Amount

 

2020 (remaining 9 months)

 

$

6,706

 

2021

 

 

8,017

 

2022

 

 

7,289

 

2023

 

 

7,139

 

2024

 

 

5,101

 

Thereafter

 

 

2,602

 

Total operating lease payments

 

 

36,854

 

Less: imputed interest

 

 

(4,213

)

Present value of operating lease liabilities

 

$

32,641

 

Weighted average remaining lease term (in years)

 

 

4.61

 

Weighted average discount rate

 

 

5.40

%

 

12


 

Future minimum commitments under the Company’s non-cancelable operating leases as of June 30, 2019 are presented in the table below (in thousands):

 

Year Ending June 30,

 

Amount

 

2020

 

$

8,675

 

2021

 

 

7,352

 

2022

 

 

7,159

 

2023

 

 

7,161

 

2024

 

 

5,118

 

Thereafter

 

 

2,610

 

Total operating lease payments

 

$

38,075

 

 

 

Note 6. Goodwill and Intangible Assets

Goodwill

Activity related to goodwill consisted of the following (in thousands):

 

 

 

September 30,

2019

 

 

June 30,

2019

 

Balance at the beginning of the period

 

$

57,770

 

 

$

57,855

 

Currency translation

 

 

(113

)

 

 

(85

)

Balance at the end of the period

 

$

57,657

 

 

$

57,770

 

 

In the second quarter of fiscal 2019, the Company performed its annual goodwill impairment test and determined that there was no impairment to goodwill. The Company continues to monitor its recorded goodwill for indicators of impairment.

Intangible Assets

The Company’s carrying amount of acquired intangible assets, net, is as follows (in thousands):

 

 

 

 

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

 

Useful

Lives

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Amount

 

 

 

(in years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patent license

 

 

7

 

 

$

1,000

 

 

$

(357

)

 

$

643

 

 

$

1,000

 

 

$

(321

)

 

$

679

 

 

During fiscal 2017, the Company purchased a patent license with a useful life of seven years. The Company did not identify any triggering events that would indicate potential impairment of its definite-lived intangible and long-lived assets as of September 30, 2019 and June 30, 2019.

Amortization expense related to intangible assets for the three months ended September 30, 2019 and 2018 was $0.04 million and $0.04 million, respectively.

 

The estimated future amortization expense of acquired intangible assets as of September 30, 2019 is as follows (in thousands):

 

Year Ending June 30,

 

Amount

 

2020 (remaining 9 months)

 

$

107

 

2021

 

 

143

 

2022

 

 

143

 

2023

 

 

143

 

2024

 

 

107

 

 

 

$

643

 

 

 

13


 

Note 7. Derivative Financial Instruments

The Company manages some of its foreign currency risk through the purchase of foreign currency forward contracts that hedge against the short-term effect of currency fluctuations. These foreign currency forward contracts have a monthly maturity that mitigates the effect of rate fluctuations on certain local currency denominated intercompany balances, cash, and customer receivables. The Company does not use derivative financial instruments for speculative or trading purposes. These forward contracts are not designated as hedging instruments for accounting purposes. Principal hedged currencies include the Euro, Japanese Yen, Swiss Franc, and U.S. Dollar. There were no outstanding foreign currency forward contracts at the end of September 30, 2019 and June 30, 2019.

The following table provides information about gain (loss) associated with the Company’s derivative financial instruments (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Foreign currency exchange gain (loss) on foreign contracts

 

$

118

 

 

$

17

 

Foreign currency transactions gain (loss)

 

 

(538

)

 

 

(530

)

 

Note 8. Fair Value Measurements

Fair value is an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels of inputs that may be used to measure fair value, as follows:

Level 1— Unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date.

Level 2— Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

 

Quoted prices for similar assets or liabilities in active markets;

 

Quoted prices for identical or similar assets in non-active markets;

 

Inputs other than quoted prices that are observable for the asset or liability; and

 

Inputs that are derived principally from or corroborated by other observable market data.

Level 3— Unobservable inputs that cannot be corroborated by observable market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

The Company had a cash balance of $80.9 million and $76.8 million at September 30, 2019 and June 30, 2019, respectively.

 

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

The Company’s debt is measured on a non-recurring basis using Level 2 inputs based upon observable inputs of the Company’s underlying stock price and the time value of the conversion option since an observable quoted price of the 3.75% Convertible Notes (as defined below) are not readily available. The Revolving Credit Facility (as defined below) and the Term Loan (as defined below) (collectively, the “Credit Facilities”) are valued at market interest rates, which the Company considers to be a level 2 fair value measurement. The carrying value of these financial instruments approximate its estimated fair value as there have not been significant changes in the Company’s credit quality or capital markets that would suggest changes in interest rates since the Credit Facilities were issued or amended in May 2019.

14


 

The following table summarizes the carrying value and estimated fair value of the Credit Facilities and the 3.75% Convertible Notes (in thousands):

 

 

 

September 30, 2019

 

 

June 30, 2019

 

 

 

Carrying

Value

 

 

Fair

Value

 

 

Carrying

Value

 

 

Fair

Value

 

3.75% Convertible Notes

 

$

73,623

 

 

$

75,098

 

 

$

72,730

 

 

$

84,227

 

Term Loan Facility

 

 

83,632

 

 

 

83,632

 

 

 

58,849

 

 

 

58,849

 

Revolving Credit Facility

 

 

31,205

 

 

 

31,205

 

 

 

28,265

 

 

 

28,265

 

Total

 

$

188,460

 

 

$

189,935

 

 

$

159,844

 

 

$

171,341

 

 

Note 9. Commitments and Contingencies

Litigation

From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. The Company records a provision for a loss when it believes that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Currently, management believes the Company does not have any probable and reasonably estimable losses related to any current legal proceedings and claims. Although occasional adverse decisions or settlements may occur, management does not believe that an adverse determination with respect to any of these claims would individually or in the aggregate materially and adversely affect the Company’s financial condition or operating results. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond the Company’s control. Should any of these estimates and assumptions change or prove to have been incorrect, the Company could incur significant charges related to legal matters that could have a material impact on its results of operations, financial position and cash flows.

Indemnities

Under the terms of the Company’s software license agreements with its customers, the Company agrees that in the event the software sold infringes upon any patent, copyright, trademark, or any other proprietary right of a third‑party, it will indemnify its customer licensees against any loss, expense, or liability from any damages that may be awarded against its customer. The Company includes this infringement indemnification in all of its software license agreements and selected managed services arrangements. In the event the customer cannot use the software or service due to infringement and the Company cannot obtain the right to use, replace or modify the license or service in a commercially feasible manner so that it no longer infringes, then the Company may terminate the license and provide the customer a refund of the fees paid by the customer for the infringing license or service. The Company has not recorded any liability associated with this indemnification, as it is not aware of any pending or threatened actions that represent probable losses as of September 30, 2019.

The Company enters into standard indemnification agreements with its landlords and all superior mortgagees and their respective directors, officers’ agents, and employees in the ordinary course of business. Pursuant to these agreements, the Company will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified p