Quarterly Report (10-q)

Date : 02/08/2019 @ 11:20AM
Source : Edgar (US Regulatory)
Stock : Accuray Incorporated (ARAY)
Quote : 2.76  0.0 (0.00%) @ 12:00AM
Accuray share price Chart

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 December 31, 2018

 

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)

 

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 January 31, 2019, there were 87,879,541 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 December 31, 2018 and June 30, 2018

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended December 31, 2018 and 2017

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity as of December 31, 2018 and September 30, 2018

5

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2018 and 2017

6

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 3.

Defaults Upon Senior Securities

62

 

 

 

Item 4.

Mine Safety Disclosures

62

 

 

 

Item 5.

Other Information

62

 

 

 

Item 6.

Exhibits

63

 

 

 

Signatures

 

64

 

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)

 

 

 

December 31,

2018

 

 

June 30,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,428

 

 

$

83,083

 

Restricted cash

 

 

5,182

 

 

 

9,830

 

Accounts receivable, net of allowance for doubtful accounts of $539 and

   $251 as of December 31, 2018 and June 30, 2018, respectively

 

 

86,333

 

 

 

65,994

 

Inventories

 

 

119,494

 

 

 

108,540

 

Prepaid expenses and other current assets

 

 

18,476

 

 

 

15,569

 

Deferred cost of revenue

 

 

273

 

 

 

1,141

 

Total current assets

 

 

289,186

 

 

 

284,157

 

Property and equipment, net

 

 

21,103

 

 

 

23,698

 

Goodwill

 

 

57,764

 

 

 

57,855

 

Intangible assets, net

 

 

750

 

 

 

821

 

Restricted cash

 

 

742

 

 

 

620

 

Other assets

 

 

16,528

 

 

 

11,576

 

Total assets

 

$

386,073

 

 

$

378,727

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

31,396

 

 

$

19,694

 

Accrued compensation

 

 

20,883

 

 

 

28,992

 

Other accrued liabilities

 

 

24,101

 

 

 

22,448

 

Customer advances

 

 

19,900

 

 

 

22,896

 

Deferred revenue

 

 

72,726

 

 

 

75,404

 

Total current liabilities

 

 

169,006

 

 

 

169,434

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term other liabilities

 

 

10,693

 

 

 

8,608

 

Deferred revenue

 

 

23,406

 

 

 

20,976

 

Long-term debt

 

 

136,823

 

 

 

131,077

 

Total liabilities

 

 

339,928

 

 

 

330,095

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

   December 31, 2018 and June 30, 2018, respectively; issued and

   outstanding: 87,885,603 and 86,129,256 shares at December 31, 2018 and

   June 30, 2018, respectively

 

 

88

 

 

 

86

 

Additional paid-in-capital

 

 

528,254

 

 

 

521,738

 

Accumulated other comprehensive income

 

 

759

 

 

 

1,093

 

Accumulated deficit

 

 

(482,956

)

 

 

(474,285

)

Total stockholders' equity

 

 

46,145

 

 

 

48,632

 

Total liabilities and stockholders' equity

 

$

386,073

 

 

$

378,727

 

 

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

December 31,

 

 

Six Months Ended

December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

48,051

 

 

$

47,106

 

 

$

89,568

 

 

$

86,022

 

Services

 

 

54,267

 

 

 

53,223

 

 

 

108,579

 

 

 

105,257

 

Total net revenue

 

 

102,318

 

 

 

100,329

 

 

 

198,147

 

 

 

191,279

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products

 

 

29,062

 

 

 

26,857

 

 

 

53,586

 

 

 

48,959

 

Cost of services

 

 

34,876

 

 

 

34,117

 

 

 

68,302

 

 

 

64,859

 

Total cost of revenue

 

 

63,938

 

 

 

60,974

 

 

 

121,888

 

 

 

113,818

 

Gross profit

 

 

38,380

 

 

 

39,355

 

 

 

76,259

 

 

 

77,461

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,640

 

 

 

14,664

 

 

 

27,529

 

 

 

28,757

 

Selling and marketing

 

 

15,139

 

 

 

13,872

 

 

 

28,175

 

 

 

28,629

 

General and administrative

 

 

10,469

 

 

 

11,836

 

 

 

26,111

 

 

 

23,144

 

Total operating expenses

 

 

39,248

 

 

 

40,372

 

 

 

81,815

 

 

 

80,530

 

Loss from operations

 

 

(868

)

 

 

(1,017

)

 

 

(5,556

)

 

 

(3,069

)

Other expense, net

 

 

(3,321

)

 

 

(3,738

)

 

 

(7,304

)

 

 

(10,309

)

Loss before provision for income taxes

 

 

(4,189

)

 

 

(4,755

)

 

 

(12,860

)

 

 

(13,378

)

Provision for (benefit from) income taxes

 

 

451

 

 

 

(36

)

 

 

986

 

 

 

723

 

Net loss

 

$

(4,640

)

 

$

(4,719

)

 

$

(13,846

)

 

$

(14,101

)

Net loss per share - basic and diluted

 

$

(0.05

)

 

$

(0.06

)

 

$

(0.16

)

 

$

(0.17

)

Weighted average common shares used in computing net loss per

   share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

87,237

 

 

 

84,586

 

 

 

86,858

 

 

 

84,167

 

Net loss

 

$

(4,640

)

 

$

(4,719

)

 

$

(13,846

)

 

$

(14,101

)

Foreign currency translation adjustment

 

 

61

 

 

 

212

 

 

 

(334

)

 

 

558

 

Unrealized gain on investments, net of tax

 

 

 

 

 

102

 

 

 

 

 

 

124

 

Comprehensive loss

 

$

(4,579

)

 

$

(4,405

)

 

$

(14,180

)

 

$

(13,419

)

 

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

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee

   stock purchase plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

2,947

 

 

 

 

 

 

 

 

 

2,947

 

Tax withholding upon vesting of restricted

   stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Exercise of stock options, net

 

 

14,550

 

 

 

 

 

 

58

 

 

 

 

 

 

 

 

 

58

 

Issuance of restricted stock

 

 

1,054,539

 

 

 

2

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

Issuance of common stock under employee

   stock purchase plan

 

 

442,051

 

 

 

 

 

 

1,540

 

 

 

 

 

 

 

 

 

1,540

 

Share-based compensation

 

 

 

 

 

 

 

 

1,959

 

 

 

 

 

 

 

 

 

1,959

 

Tax withholding upon vesting of restricted

   stock units

 

 

(125,797

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of new revenue recognition

   standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

61

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,640

)

 

 

(4,640

)

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

61

 

Balance at December 31, 2018

 

 

87,885,603

 

 

 

88

 

 

 

528,254

 

 

 

759

 

 

 

(482,956

)

 

 

46,145

 

 

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

5


 

Accuray Incorporated

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended

December 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(13,846

)

 

$

(14,101

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,174

 

 

 

5,007

 

Share-based compensation

 

 

4,899

 

 

 

5,870

 

Amortization of debt issuance costs

 

 

764

 

 

 

868

 

Amortization and accretion of discount and premium on investments

 

 

 

 

 

(10

)

Accretion of interest on debt

 

 

1,626

 

 

 

1,727

 

Provision for bad debt

 

 

3,615

 

 

 

22

 

Provision for write-down of inventories

 

 

1,302

 

 

 

1,189

 

Loss on disposal of property and equipment

 

 

156

 

 

 

11

 

Loss on extinguishment of debt

 

 

 

 

 

3,192

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(21,518

)

 

 

(10,156

)

Inventories

 

 

(11,718

)

 

 

(11,832

)

Prepaid expenses and other assets

 

 

(3,587

)

 

 

5,855

 

Deferred cost of revenue

 

 

405

 

 

 

1,206

 

Accounts payable

 

 

11,558

 

 

 

8,085

 

Accrued liabilities

 

 

(6,109

)

 

 

(8,059

)

Customer advances

 

 

(3,022

)

 

 

2,787

 

Deferred revenues

 

 

(297

)

 

 

(5,401

)

Net cash used in operating activities

 

 

(31,598

)

 

 

(13,740

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment, net

 

 

(2,218

)

 

 

(1,977

)

Purchases of investments

 

 

 

 

 

(5,940

)

Sales and maturities of investments

 

 

 

 

 

6,000

 

Net cash used in investing activities

 

 

(2,218

)

 

 

(1,917

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from employee stock plans

 

 

2,048

 

 

 

2,036

 

Taxes paid related to net share settlement of equity awards

 

 

 

 

 

(293

)

Proceeds from debt, net of costs

 

 

5,000

 

 

 

66,111

 

Payments made to note and loan holders

 

 

 

 

 

(29,581

)

Repayments under Revolving Credit Facility, net

 

 

(1,147

)

 

 

(26,565

)

Net cash provided by financing activities

 

 

5,901

 

 

 

11,708

 

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

 

 

(266

)

 

 

891

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(28,181

)

 

 

(3,058

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

93,533

 

 

 

85,235

 

Cash, cash equivalents and restricted cash at end of period

 

$

65,352

 

 

$

82,177

 

 

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 and six months ended December 31, 2018 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2019, 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, 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 24, 2018.

Significant Accounting Policies

 

The Company adopted the Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers as of July 1, 2018, using the modified retrospective method. See Note 2. Recent Accounting Pronouncements and Note 3. Revenue , to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional details. Except for the changes in the revenue recognition policy, there have been no other material changes to the Company’s accounting policies from the information provided in Note 1 . The Company and its Significant Accounting Policies to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2018.

 

Revenue Recognition

 

The Company’s revenue is primarily derived from sales of CyberKnife and TomoTherapy Systems and services, which include post-contract customer support (“PCS”), installation services, training and other professional services.

 

The Company has a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

The Company's revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and amounts collected on behalf of third parties such as sales taxes, excise taxes, and VAT.

 

The majority of the Company's revenue arrangements consists of multiple performance obligations, which can include system, upgrades, installation, training, services, construction, and consumables. For bundled arrangements, the Company accounts for individual products and services separately if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer.  

 

7


 

The Company s products are generally not sold with a right of return, and the Company s contracts generally provide a fixed transaction price. However, the Company from time to time offers variable consideration such as volume discounts. The Company also from time to time offers extended pay ment terms beyond one year, trade-in allowance for old systems, and commissions or other forms of payment to customers. The Company elected to use the practical expedient to not adjust for a significant financing component if the gap between payment and de livery was expected, at the contract inception, to be less than one year.

 

The stand-alone selling price (“SSP”) of performance obligations is determined based on observable prices at which the Company separately sells the products and services. If the SSP is not directly observable, then the Company will estimate the SSP considering market conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available. The SSP is generally assessed as a percentage of the list price. The contract consideration allocation is based on the SSP at contract inception. The consideration (net of any discounts) is allocated among separate products and services in a bundle based on their individual SSP. For contract modifications that add additional goods or services or changes pricing, the most recent SSP is used for allocation to the remaining performance obligations.

 

The Company recognizes revenue for certain performance obligations at the point in time when control is transferred, such as delivery of products. The Company recognizes revenue for certain other performance obligations over a period of time as control of the goods or services is transferred, such as PCS and construction contracts.  

 

The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year. The Company capitalizes incremental contract acquisition costs, and amortizes such costs over the period which the Company expects to benefit, which may extend beyond the initial contract term. Most of the Company’s contract costs are associated with its internal sales force compensation program and a portion of its employee bonus program. The Company amortizes capitalized bonuses and a portion of sales commissions over a period of five years commencing upon the initial transfer of control of the system to the customer. The pattern of amortization is commensurate with the pattern of transfer of control of the performance obligations to the customer. The Company elected to use the practical expedient in ASC 340-40-25-4 and expense as incurred commissions related to service renewals and upgrades because the contract term is less than a year.

 

Note 2. Recent Accounting Pronouncements

Accounting Pronouncement Recently Adopted

 

In June 2018, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-7, Compensation – Stock Compensation (Topic 718) )— Improvements to Nonemployee Share-Based Payment Accounting . This guidance supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The guidance permits early adoption and was adopted by the Company in the first quarter of fiscal year 2019. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting. This guidance redefines which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting for a share-based payment. Modification accounting will not be applied if the following are the same immediately before and after the change: fair value, vesting conditions, and classification. The Company adopted ASU No. 2017-09 as required in the first quarter of fiscal year 2019 on a prospective basis. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715)—Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This guidance revises the presentation of employer-sponsored defined benefit pension and other postretirement plans for the net periodic benefit cost in the statement of operations and requires that the service cost component of net periodic benefit be presented in the same income statement line items as other employee compensation costs for services rendered during the period. The other components of the net benefit costs are required to be presented in the statement of operations separately from the service cost component and outside the subtotal of income from operations. This guidance allows only the service cost component of net periodic benefit costs to be eligible for capitalization. In addition, changes to the presentation of benefit costs were required to be adopted retrospectively, while changes to the capitalization of service costs into inventories were required to be adopted prospectively. The standard permits, as a practical expedient, use of the amounts disclosed in the pension plans footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirement. The Company adopted ASU No. 2017-07 as required in the first quarter of fiscal year 2019, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures.

 

8


 

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 c larifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The amendments in the update provide guidance on eight specific cash flow issues. The amendments to the guidance should be applied using a retrospective transition method for each period presented and, if it is impracticable to apply all of the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicab le. The Company adopted ASU No. 2016-15 as required in the first quarter of fiscal year 2019. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted this ASU No. 2016-01 as required in the first quarter of fiscal year 2019 on a required modified retrospective approach. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-04,  Intangibles-Goodwill and Other Topics (Topic 350)-Simplifying the Test for Goodwill Impairment. This guidance simplifies the measurement of goodwill by eliminating the Step 2 impairment test. The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. This guidance will be effective for the Company beginning in its first quarter of fiscal 2021. The amendment is required to be adopted prospectively. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this guidance in the first quarter of fiscal year 2019 and adoption of this ASU did not have any impact on its consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606 ), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is required to be adopted, using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. The Company adopted the new revenue standards as of July 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of that date.

 

The Company completed its assessment of the impact this guidance has on its consolidated financial statements and related disclosures. Based on that assessment, the Company concluded the significant impact areas were the capitalization and amortization of incremental costs of obtaining a contract, primarily related to certain bonuses and sales commissions, change in SSP and the removal of software revenue recognition rules along with the elimination of revenue deferral for cash basis customers. Under the new standards, the Company capitalizes incremental contract acquisition costs, such as certain bonuses and sales commissions, and amortizes such costs over the period which the Company benefits, as estimated by management, which may extend beyond the initial contract term. The Company amortizes capitalized bonuses and sales commissions over a period of five years commencing upon the initial transfer of control of the system to the customer. The pattern of amortization is commensurate with the pattern of transfer of control of the performance obligations to the customer. The Company elected to use the practical expedient in ASC 340-40-25-4 and expense commissions related to service renewals and upgrades with a renewal contract term of one year or less as incurred. The Company recorded a net reduction to opening accumulated deficit of $5.1 million, net of tax, as of July 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to the deferral of incremental costs to obtain contracts.

 

Under ASC 606, product revenue for direct sales are accelerated to reflect transfer of control upon delivery while an element of installation is deferred until performed. Prior to the adoption of ASC 606, the Company deferred revenue until installation had occurred. The revenue recognition method for indirect sales and service revenues is unchanged under the new guidance.

 

Refer to Note 3, Revenue, to the Unaudited Condensed Consolidated Financial Statement on this Quarterly report for the detailed impact of adopting ASC 606.

 

9


 

Accounting Pronouncements Not Yet Effective

 

In February 2018, the FASB issued ASU No. 2018-2, 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 guidance will be effective for the Company in its first quarter of fiscal 2020. Early adoption is permitted. The guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company has not yet selected a transition method, has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

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 will be effective for the Company in its first quarter of fiscal 2020. Early adoption is permitted. The guidance is required to be adopted on a prospective basis. The Company will not early adopt and does not believe the adoption of this standard will have a material impact 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 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 February 2016, the FASB issued ASU No. 2016-02,  Leases (Topic 842) . Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This guidance will be effective for the Company in the first quarter of fiscal 2020 and early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvements , which provides another transition method in addition to the existing modified retrospective transition approach. Accordingly, the new method allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company intends to adopt the  allowed transition method allowed under ASU 2018-11, but will not elect early adoption, and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.

 

Note 3. Revenue

 

On July 1, 2018 the Company adopted ASC 606 electing the modified retrospective method for contracts that were still open as of July 1, 2018. Results for reporting periods after July 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with legacy accounting guidance under ASC 605.

 

The beginning net cumulative-effect adjustment to retained earnings for the adoption of ASC 606 is as follows:

 

 

 

Balance at

 

 

Adjustment   Due to

 

 

Balance at

 

(Dollars in thousands)

 

July 1, 2018

 

 

ASC 606

 

 

June 30, 2018

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Account receivable, net

 

$

66,251

 

 

$

257

 

 

$

65,994

 

Deferred cost of revenue - current

 

 

677

 

 

 

(464

)

 

 

1,141

 

Prepaid expenses and other current assets

 

 

16,239

 

 

 

670

 

 

 

15,569

 

Other assets

 

 

17,416

 

 

 

5,840

 

 

 

11,576

 

Liabilities and Stockholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

23,059

 

 

 

611

 

 

 

22,448

 

Deferred revenue - current

 

 

75,515

 

 

 

111

 

 

 

75,404

 

Long-term other liabilities

 

 

9,075

 

 

 

467

 

 

 

8,608

 

Accumulated deficit

 

 

(469,171

)

 

 

5,114

 

 

 

(474,285

)

10


 

 

 

Select unaudited condensed consolidated balance sheets line items, which reflect the adoption of ASC 606 are as follows:

 

 

 

December 31, 2018

 

(Dollars in thousands)

 

As Reported

 

 

Adjustments

 

 

Balances

Without

Adoption

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Account receivable, net

 

$

86,333

 

 

$

3,979

 

 

$

82,354

 

Deferred cost of revenue - current

 

 

273

 

 

 

(12,346

)

 

 

12,619

 

Prepaid expenses and other current assets

 

 

18,476

 

 

 

1,730

 

 

 

16,746

 

Other assets

 

 

16,528

 

 

 

6,661

 

 

 

9,867

 

Liabilities and Stockholders' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

 

24,101

 

 

 

755

 

 

 

23,346

 

Deferred revenue - current

 

 

72,726

 

 

 

(20,278

)

 

 

93,004

 

Long-term other liabilities

 

 

10,693

 

 

 

1,123

 

 

 

9,570

 

Accumulated deficit

 

 

(482,956

)

 

 

18,424

 

 

 

(501,380

)

 

Select unaudited condensed consolidated statements of operations and comprehensive loss line items for the three and six months ended December 31, 2018, which reflect the adoption of ASC 606 are as follows:

 

 

 

Three Months Ended December 31, 2018

 

 

Six Months Ended December 31, 2018

 

(Dollars in thousands)

 

As Reported

 

 

Adjustments

 

 

Balances Without

Adoption

 

 

As Reported

 

 

Adjustments

 

 

Balances Without

Adoption

 

Net revenue

 

$

102,318

 

 

$

5,128

 

 

$

97,190

 

 

$

198,147

 

 

$

23,843

 

 

$

174,304

 

Cost of goods sold

 

 

63,938

 

 

 

1,112

 

 

 

62,826

 

 

 

121,888

 

 

 

11,706

 

 

 

110,182

 

Other expense, net

 

 

3,321

 

 

 

(171

)

 

 

3,492

 

 

 

7,304

 

 

 

(259

)

 

 

7,563

 

Research and development

 

 

13,640

 

 

 

(104

)

 

 

13,744

 

 

 

27,529

 

 

 

(136

)

 

 

27,665

 

Selling and marketing

 

 

15,139

 

 

 

(269

)

 

 

15,408

 

 

 

28,175

 

 

 

(459

)

 

 

28,634

 

General and administrative

 

 

10,469

 

 

 

(246

)

 

 

10,715

 

 

 

26,111

 

 

 

(289

)

 

 

26,400

 

Provision for income taxes

 

 

451

 

 

 

(105

)

 

 

556

 

 

 

986

 

 

 

(30

)

 

 

1,016

 

Net loss

 

 

(4,640

)

 

 

4,911

 

 

 

(9,551

)

 

 

(13,846

)

 

 

13,310

 

 

 

(27,156

)

Net loss per share - Basic and Diluted

 

$

(0.05

)

 

$

0.06

 

 

$

(0.11

)

 

$

(0.16

)

 

$

0.15

 

 

$

(0.31

)

 

 

The adoption of ASC 606 had no impact to net cash from or used in operating, investing or financing activities in the Company's unaudited condensed consolidated statements of cash flows.

 

Contract Balances

 

The timing of revenue recognition, billings, and cash collections results in trade, unbilled receivables, and deferred revenues on the unaudited condensed consolidated statement of balance sheets. The Company may offer longer or extended payments of more than one year for qualified customers in some circumstances. At times, revenue recognition occurs before the 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.

 

When the Company receives advances or deposits from customers before revenue is recognized, this results in deferred revenues, which represents a contract liability. It can take up to two and half years from the time of order to revenue recognition due to the Company’s long sales cycle.  

 

11


 

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

 

 

 

December 31,

2018

 

 

July   1,

2018

 

 

Change

 

(Dollars in thousands)

 

Amount

 

 

Amount

 

 

$

 

 

%

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unbilled accounts receivable - current (1)

 

$

11,025

 

 

$

3,218

 

 

 

7,807

 

 

 

71

 

Long Term Accounts Receivable (2)

 

 

4,797

 

 

 

6,833

 

 

 

(2,036

)

 

 

(42

)

Interest receivable - no