The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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, an MR Image-Guided radiation therapy system to simultaneously image and treat cancer patients.
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, shipment and installation 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-60. In November 2013, ViewRay Technologies, Inc. received its first clinical acceptance of a MRIdian with Cobalt-60 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-60 in the European Economic Area since November 2014. In September 2016, the Company received the rights to affix the Conformité Européene, or CE, mark to MRIdian Linac, 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. The Company’s principal sources of liquidity are cash flows from public and private offerings and available borrowings under its term loan agreement, as well as cash receipts from its sales of MRIdian systems. These have historically been sufficient to meet working capital needs, capital expenditures, operating expenses, and debt service obligations. During the nine months ended September 30, 2019, the Company incurred a net loss of $85.0 million and used cash in operating activities of $76.6 million. The Company believes that its existing cash balance of $90.8 million as of September 30, 2019, together with anticipated cash proceeds from sales of MRIdian systems will be 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, or U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. The condensed consolidated financial statements include the accounts of ViewRay, Inc. and its wholly-owned subsidiary, ViewRay Technologies, Inc. All inter-company accounts and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements, have been included. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future period. These unaudited condensed consolidated financial statements and their notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 842, or Topic 842, Leases, by using a modified retrospective transition approach. The adoption of Topic 842 had no impact on the Company’s prior period financial statements. Refer to Note 6, Commitments and Contingencies for further information and related disclosures.
Significant Accounting Policies
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, 2018 filed with the SEC on March 15, 2019, and have not changed significantly since that filing, except for the January 1, 2019 adoption of the new accounting guidance Topic 842, Leases, and the second quarter 2019 change in the recognition of certain revenue resulting from changes in facts and circumstances. Refer to the Recently Adopted Accounting Pronouncements below and to Note 6, Commitments and Contingencies, and Note 7, Revenue, for further information and related disclosures.
9
Recent Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update, or ASU, No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. The Company is allowed to early adopt either the entire standard or only the provisions that eliminate or modify the requirements of Topic 820. The Company is evaluating the impact of this update on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases, and issued subsequent amendments to the initial guidance in September 2017 within ASU 2017-13, in January 2018 within ASU 2018-01, in July 2018 within ASU 2018-10 and ASU 2018-11, and in March 2019 within ASU 2019-01 (collectively, Topic 842). Topic 842 supersedes Topic 840, Leases, and requires lessees to recognize on their balance sheets all leases, with the exception of short-term leases, as a right-of-use asset and a corresponding lease liability measured at the present value of the lease payments. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard requires expanded disclosures regarding leasing arrangements. Effective January 1, 2019, the Company adopted Topic 842 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. There was no cumulative-effect adjustment recorded to retained deficit upon adoption.
Topic 842 provides several optional practical expedients in transition. The Company elected to use the package of practical expedients permitted under the transition guidance, which allows the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs for any leases that existed prior to January 1, 2019. The Company did not elect to use the other practical expedients provided.
Upon adoption, the Company recognized the right-of-use assets and operating lease liabilities totaling approximately $11.9 million and $12.6 million, respectively, to reflect the present value of remaining lease payments under existing lease arrangements with no impact to the opening balance of retained deficit as a result of adoption. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the leased assets.
In determining the present value of lease payments, the Company uses the rate implicit in the lease or when such rate is not readily available, we utilize our incremental borrowing rate based on the information available at the lease commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. In determining the expected lease term, the Company may include options to extend or terminate the lease when it is reasonably certain that it will exercise any such option. For more information on the impact of adoption and the disclosures required by the new standard, refer to Note 6, Commitments and Contingencies.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 on January 1, 2019, and the adoption did not have a material impact on its condensed consolidated financial statements and related disclosures.
3.
|
Balance Sheet Components
|
Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
Prototype
|
|
$
|
12,512
|
|
|
$
|
12,425
|
|
Machinery and equipment
|
|
|
15,588
|
|
|
|
12,654
|
|
Leasehold improvements
|
|
|
5,055
|
|
|
|
4,600
|
|
Furniture and fixtures
|
|
|
998
|
|
|
|
636
|
|
Software
|
|
|
1,389
|
|
|
|
1,250
|
|
Construction in progress
|
|
|
8,806
|
|
|
|
148
|
|
Property and equipment, gross
|
|
|
44,348
|
|
|
|
31,713
|
|
Less: accumulated depreciation and amortization
|
|
|
(20,911
|
)
|
|
|
(17,755
|
)
|
Property and equipment, net
|
|
$
|
23,437
|
|
|
$
|
13,958
|
|
10
Depreciation and amortization expense related to property and equipment were $1.2 million and $0.9 million during the three months ended September 30, 2019 and 2018, and $3.2 million and $2.5 million during the nine months ended September 30, 2019 and 2018, respectively.
Intangible Assets
In September 2019, the Company entered into a licensing agreement (the “License”) with VU University Medical Center, or VUmc, whereby VUmc granted the Company a worldwide exclusive license to developed strategies for fast stereotactic MR-guided adaptive radiation therapy for $57 thousand. The License is amortized on a straight-line basis over ten years. During the three and nine months ended September 30, 2019 and 2018, there was no intangible assets amortization expense.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
Accrued payroll and related benefits
|
|
$
|
7,094
|
|
|
$
|
5,047
|
|
Accrued accounts payable
|
|
|
2,683
|
|
|
|
3,626
|
|
Payroll withholding tax, sales and other tax payable
|
|
|
3,378
|
|
|
|
782
|
|
Accrued legal, accounting and professional fees
|
|
|
375
|
|
|
|
360
|
|
Product upgrade reserve
|
|
|
3,794
|
|
|
|
—
|
|
Other
|
|
|
1,511
|
|
|
|
168
|
|
Total accrued liabilities
|
|
$
|
18,835
|
|
|
$
|
9,983
|
|
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
Deferred revenue:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
3,654
|
|
|
$
|
9,623
|
|
Service
|
|
|
7,991
|
|
|
|
6,981
|
|
Distribution rights
|
|
|
2,515
|
|
|
|
2,871
|
|
Total deferred revenue
|
|
|
14,160
|
|
|
|
19,475
|
|
Less: current portion of deferred revenue
|
|
|
(9,644
|
)
|
|
|
(13,731
|
)
|
Noncurrent portion of deferred revenue
|
|
$
|
4,516
|
|
|
$
|
5,744
|
|
Other Long-Term Liabilities
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
Accrued interest, noncurrent portion
|
|
$
|
347
|
|
|
$
|
—
|
|
Deferred rent, noncurrent portion
|
|
|
—
|
|
|
|
628
|
|
Other
|
|
|
215
|
|
|
|
192
|
|
Total other-long term liabilities
|
|
$
|
562
|
|
|
$
|
820
|
|
11
4.
|
Fair Value of Financial Instruments
|
Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at September 30, 2019 and December 31, 2018. Level 3 liabilities that are measured on a recurring basis relate to the 2017 and 2016 Placement Warrants, as described in Note 9. Placement warrant liabilities are valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock, volatility 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 and comprehensive loss. During the three and nine months ended September 30, 2019, the Company recorded a gain of $13.5 million and a gain of $8.6 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants. During the three and nine months ended September 30, 2018, the Company recorded a loss of $6.7 million and a gain of $0.4 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants. There were no transfers between Level 1, Level 2 and Level 3 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 September 30, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
2017 Placement Warrants Liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,408
|
|
|
$
|
2,408
|
|
2016 Placement Warrants Liability
|
|
|
—
|
|
|
|
—
|
|
|
|
786
|
|
|
|
786
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,194
|
|
|
$
|
3,194
|
|
|
|
At December 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
2017 Placement Warrants Liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,115
|
|
|
$
|
7,115
|
|
2016 Placement Warrants Liability
|
|
|
—
|
|
|
|
—
|
|
|
|
4,729
|
|
|
|
4,729
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,844
|
|
|
$
|
11,844
|
|
The following table sets forth a summary of the changes in fair value of the Company’s Level 3 financial liabilities (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Fair value, beginning of period
|
|
$
|
11,844
|
|
|
$
|
22,420
|
|
Change in fair value of Level 3 financial liabilities
|
|
|
(4,674
|
)
|
|
|
(116
|
)
|
Fair value of 2016 Placement Warrants at exercise
|
|
|
(3,458
|
)
|
|
|
(342
|
)
|
Fair value of 2017 Placement Warrants at exercise
|
|
|
(518
|
)
|
|
|
—
|
|
Fair value, end of period
|
|
$
|
3,194
|
|
|
$
|
21,962
|
|
12
SVB Term Loan
In December 2018, the Company entered into a term loan agreement, or the SVB Term Loan, with Silicon Valley Bank, for a principal amount of $56.0 million. The SVB Term Loan has a maturity date of December 1, 2023 and bears interest at a rate of 6.30% per annum to be paid monthly over the term of the loan. Beginning on December 1, 2020 (or June 1, 2021, if the Company achieves a trailing twelve-month revenue of at least a specified amount and elects to apply such later date), the Company will make thirty-six equal monthly payments of principal (or thirty equal payments, if the Company so elects). In addition, upon repayment of the SVB Term Loan in full, the Company will make a final payment equal to 3.15% of the original aggregate principal amount of the SVB Term Loan.
The Company used the proceeds of the SVB Term Loan and cash on hand to repay in full its outstanding obligations under its then outstanding term loan, or the CRG Term Loan, and to pay fees and expenses related thereto. The Company accounted for the termination of the CRG Term Loan as a debt extinguishment and recorded a debt extinguishment loss of $2.4 million from the difference between the net carrying amount of debt and the amount paid. The debt extinguishment loss includes $0.3 million in write-offs of unamortized debt discount and debt issuance costs associated with the CRG Term Loan.
The Company received net proceeds from the SVB Term Loan of $55.4 million after related legal and consulting fees totaling $0.6 million. Such fees are accounted for as debt discount and issuance costs and presented as a direct deduction from the carrying amount of debt on the Company’s consolidated balance sheets. Debt discount, issuance costs and the final payment are amortized or accreted as interest expense over the term of the loan using the effective interest method.
The SVB Term Loan is secured by substantially all assets of the Company, except that the collateral does not include any intellectual property held by the Company, provided, however, the collateral shall include all accounts and proceeds of such intellectual property.
The SVB Term Loan contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions and transactions with affiliates. The SVB Term Loan also contains financial covenants that require the Company to maintain a minimum cash balance in accounts maintained at Silicon Valley Bank or one of its affiliates or else comply with a liquidity ratio and/or a minimum revenue target.
The SVB Term Loan includes standard events of default, including, among other things, subject in certain cases to customary grace periods, thresholds and notice requirements, the Company’s failure to fulfill its obligations under the SVB Term Loan or the occurrence of a material adverse change in the Company's business, operations, or condition (financial or otherwise). In the event of default by the Company under the SVB Term Loan, Silicon Valley Bank would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the SVB Loan, which could harm the Company's financial condition.
The Company’s scheduled future payments on the SVB Term Loan at September 30, 2019 are as follows (in thousands):
Year Ended December 31,
|
|
|
|
|
The remainder of 2019
|
|
$
|
—
|
|
2020
|
|
|
1,555
|
|
2021
|
|
|
18,667
|
|
2022
|
|
|
18,667
|
|
2023
|
|
|
17,111
|
|
Total future principal payments
|
|
|
56,000
|
|
Less: unamortized debt discount
|
|
|
(511
|
)
|
Carrying value of long-term debt
|
|
|
55,489
|
|
Less: current portion
|
|
|
—
|
|
Long-term portion
|
|
$
|
55,489
|
|
13
6.
|
Commitments and Contingencies
|
Operating Leases
The Company leases office space in Oakwood Village, Ohio, Mountain View, California and Denver, Colorado under noncancelable operating lease agreements. The Company leases and occupies approximately 19,800 square feet of office space in Oakwood Village, Ohio, which expires in October 2021.
In June 2014, the Company entered into an office lease agreement to lease approximately 25,500 square feet of office space located in Mountain View, California, with an original expiration date of November 2019. In June 2018, the Company entered into an amendment to extend the term of the lease agreement through July 2025.
In April 2018, the Company entered into a lease agreement to lease approximately 24,600 square feet of additional office space located in Mountain View, California. The lease commenced in December 2018 and will expire in December 2025. The Company has the option to extend the term of the lease for a period of up to five years.
In May 2019, the Company entered into a sub-lease agreement to lease approximately 19,800 square feet of office space located in Denver, Colorado. The sub-lease commenced in June 2019 and will expire in May 2021.
In recognition of the right-of-use assets and the related lease liabilities, with the exception of the Oakwood Village, Ohio lease, the options to extend the lease term have not been included as the Company is not reasonably certain that it will exercise any such option. At September 30, 2019, the weighted-average remaining lease term in years is 5.6 years and the weighted-average discount rate used is 7.7%.
During the three and nine months ended September 30, 2019, the Company recognized the following lease costs arising from lease transactions:
|
|
Three Months Ended September 30, 2019
|
|
|
Nine Months Ended September 30, 2019
|
|
Operating lease cost
|
|
$
|
782
|
|
|
$
|
2,085
|
|
During the nine months ended September 30, 2019, the Company recognized the following cash flow transactions arising from lease transactions:
|
|
For the Nine Months Ended September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
1,742
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
1,647
|
|
At September 30, 2019, the future payments and interest expense for the operating leases are as follows:
Year Ending December 31,
|
|
Future Payments
|
|
The remainder of 2019
|
|
$
|
710
|
|
2020
|
|
|
3,148
|
|
2021
|
|
|
2,831
|
|
2022
|
|
|
2,496
|
|
2023
|
|
|
2,571
|
|
2024
|
|
|
2,604
|
|
Thereafter
|
|
|
1,924
|
|
Total undiscounted cash flows
|
|
$
|
16,284
|
|
Less: imputed interest
|
|
|
(3,078
|
)
|
Present value of lease liabilities
|
|
$
|
13,206
|
|
14
The rent expense for operating leases for the three and nine months ended September 30, 2018 using the accounting guidance in effect at that time was $0.5 million and $0.9 million, respectively.
At December 31, 2018, the future minimum payments for the operating leases were as follows (in thousands):
Year Ending December 31,
|
|
Future Minimum
Payments
|
|
2019
|
|
$
|
2,070
|
|
2020
|
|
|
2,353
|
|
2021
|
|
|
2,424
|
|
2022
|
|
|
2,496
|
|
2023
|
|
|
2,571
|
|
Thereafter
|
|
|
4,532
|
|
Total future minimum payments
|
|
$
|
16,446
|
|
Legal Proceedings
In the normal course of business, the Company may become involved in legal proceedings. The Company will accrue a liability for legal proceedings when it is 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. 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.
Patent Litigation
On September 10, 2019, a complaint for patent infringement was filed by Varian Medical Systems, Inc., in U.S. District Court for the Northern District of California against the Company. Captioned Varian Medical Systems, Inc., v. ViewRay, Inc., the complaint alleges that the Company infringes two related patents, U.S. Patent Nos. 8,637,841 (the “’841 Patent”) and 9,082,520 (the “’520 Patent”). The Company filed its answer on November 1, 2019. The Company believes the allegations in the complaint are without merit and intends to vigorously defend the litigation.
Class Action Litigation
On September 13, 2019, a class action complaint for violation of federal securities laws was filed in U.S. District Court for the Northern District of Ohio against the Company, its chief executive officer, chief science officer and former chief financial officer. Captioned Corwin v. ViewRay, Inc., et al., the complaint, purportedly brought on behalf of all purchasers of the Company’s common stock between March 15, 2019 and August 8, 2019, alleges that the Company violated federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts concerning the Company’s business, operations, and financial results. The Company believes the allegations in the complaint are without merit and intends to vigorously defend the litigation.
Given the early stage of each of the litigation matters described above, at this time we are unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved and on our business generally. In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention and may materially adversely affect our reputation, even if resolved in our favor.
Purchase Commitments
At September 30, 2019, the Company had $4.9 million in outstanding firm purchase commitments.
15
The Company derives revenue primarily from the sale of MRIdian systems and related services as well as support and maintenance services on sold systems. Revenue is categorized as product revenue, service revenue and distribution rights revenue.
The following table presents revenue disaggregated by type and geography (in thousands):
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
6,107
|
|
|
$
|
6,187
|
|
|
$
|
28,394
|
|
|
$
|
25,775
|
|
Service
|
|
1,140
|
|
|
|
566
|
|
|
|
3,094
|
|
|
|
1,464
|
|
Total U.S. revenue
|
$
|
7,247
|
|
|
$
|
6,753
|
|
|
$
|
31,488
|
|
|
$
|
27,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside of U.S. ("OUS")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
12,589
|
|
|
$
|
10,305
|
|
|
$
|
37,081
|
|
|
$
|
31,462
|
|
Service
|
|
908
|
|
|
|
490
|
|
|
|
2,388
|
|
|
|
1,242
|
|
Distribution rights
|
|
118
|
|
|
|
118
|
|
|
|
356
|
|
|
|
356
|
|
Total OUS revenue
|
$
|
13,615
|
|
|
$
|
10,913
|
|
|
$
|
39,825
|
|
|
$
|
33,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
18,696
|
|
|
$
|
16,492
|
|
|
$
|
65,475
|
|
|
$
|
57,237
|
|
Service
|
|
2,048
|
|
|
|
1,056
|
|
|
|
5,482
|
|
|
|
2,706
|
|
Distribution rights
|
|
118
|
|
|
|
118
|
|
|
|
356
|
|
|
|
356
|
|
Total revenue
|
$
|
20,862
|
|
|
$
|
17,666
|
|
|
$
|
71,313
|
|
|
$
|
60,299
|
|
Product Revenue
Beginning in the second quarter of 2019, the Company determined that the MRIdian system and installation of the MRIdian system, which had previously been one performance obligation, are now two performance obligations as they are capable of being distinct and are distinct within the context of the system contracts. This change occurred due primarily to changes in facts and circumstances, whereby there are now readily available resources outside the Company that can perform the system installations.
Additionally, certain revenue contracts have terms that result in the control of the system transferring to the customer upon delivery and inspection, as opposed to historically upon customer acceptance. For contracts in which control of the system transfers upon delivery and inspection, the Company recognizes revenue for the systems at the point in time when delivery and inspection by the customer has occurred. For these same contracts, the Company recognizes installation revenue over the period of installation as the installation services are performed and control is transferred to the customer. For all contracts in which control continues to transfer upon post-implementation customer acceptance, revenue for the system and installation will continue to be recognized upon customer acceptance.
Certain customer contracts with distributors do not require ViewRay installation at the ultimate user site, and the distributors may either perform the installation themselves or hire another party to perform the installation. For sales of MRIdian systems for which the Company is not responsible for installation, revenue recognition occurs when the entire system is delivered and inspected, which is when the control of the system is transferred to the customer.
Distribution agreement
In connection with the distribution agreement entered into in December 2014, between the Company and Itochu Corporation, or Itochu, the Company received a distribution fee of $4.0 million in three installments from Itochu for serving as the Company’s exclusive distributor for the sale and delivery of its MRIdian systems within Japan. In August 2016, the Company started recognizing distribution rights revenue ratably over the remaining term of the exclusive distribution agreement of approximately 8.5 years. A time-elapsed method is used to measure progress because control is transferred evenly over the remaining contractual period. The distribution rights revenues were $0.1 million for each of the three months ended September 30, 2019 and 2018, and $0.4 million for each of the nine months ended September 30, 2019 and 2018, respectively.
Contract Balances
The timing of revenue recognition, billings and cash collections results in short-term and long-term trade receivables, customer deposits, deferred revenues and deferred cost of revenue on the condensed consolidated balance sheets.
16
Trade receivables are recorded at the original invoiced amount, net of an estimated allowance for doubtful accounts. Trade credit is generally extended on a short-term basis. The Company occasionally provides for long-term trade credit for its maintenance services so that the period between when the services are rendered to its customers and when the customers pay for that service is within one year. Thus, the Company’s trade receivables do not bear interest or contain a significant financing component. Long-term trade receivables of $0.2 million and $0.4 million were reported within other assets in the condensed consolidated balance sheets at September 30, 2019 and at December 31, 2018, respectively. These amounts are billed in accordance with the terms of the customer contracts to which they relate and are expected to be collected three to four years from the date of invoice as the underlying maintenance services are rendered. At times, billing occurs subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. This contract asset is recorded as an unbilled receivable and reported as part of accounts receivable on the condensed consolidated balance sheets.
Trade receivables are periodically evaluated for collectability based on past credit history of the respective customers and their current financial condition. Changes in the estimated collectability of trade receivables are included in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for doubtful accounts. The Company generally does not require collateral for trade receivables. There were no allowances for doubtful accounts recorded at September 30, 2019 or December 31, 2018.
Customer deposits represent payments received in advance of system installation. For domestic and international sales, advance payments received prior to inventory shipments are recorded as customer deposits. Advance payments are subsequently reclassified to deferred revenue upon inventory shipment. All customer deposits, including those that are expected to be a deposit for more than one year, are classified as current liabilities based on consideration of the Company’s normal operating cycle (the time between acquisition of the inventory components and the final cash collection from customers on these inventory components) which is in excess of one year.
Deferred revenue consists of deferred product revenue and deferred service revenue. Deferred product revenue arises from timing differences between the fulfillment of contract obligations and satisfaction of all revenue recognition criteria consistent with the Company’s revenue recognition policy. Deferred service revenue results from the advance billing for services to be delivered over a period of time. Deferred revenues expected to be realized within one year or normal operating cycle are classified as current liabilities.
Deferred cost of revenue consists of cost for inventory items that have been shipped, but revenue recognition has not yet occurred. Deferred cost of revenue is included as part of current assets as the corresponding deferred product revenue is expected to be realized within one year or the Company’s normal operating cycle.
During the three and nine months ended September 30, 2019, the Company recognized $2.4 million and $11.9 million, respectively, of revenues that were included in the deferred revenue balance at the beginning of each reporting period. During the three and nine months ended September 30, 2018, the Company recognized $12.2 million and $18.3 million, respectively, of revenues that were included in the deferred revenue balance at the beginning of each reporting period.
Variable Consideration
The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. The Company estimates the transaction price at contract inception, including any variable consideration, and updates the estimate each reporting period for any changes. For the three and nine months ended September 30, 2019 the Company recognized $0.0 million and $0.9 million, respectively, in revenue from performance obligations satisfied in a prior period. The cumulative catch-up adjustment resulted from a change in transaction price related to variable consideration that was constrained in prior periods.
Public Offering of Common Stock
On August 14, 2018, the Company entered into an underwriting agreement with Morgan Stanley & Co. LLC and Jefferies LLC, as representatives of several underwriters, or the “Underwriters”, in connection with the issuance and sale of 16,216,217 shares of the Company’s common stock at a public offering price of $9.25 per share. In addition, the Company granted the Underwriters a 30-day option to purchase up to 2,432,432 additional shares of common stock on the same terms, which the Underwriters exercised in full. The Company completed the offering on August 17, 2018 under which it received aggregate net proceeds of approximately $161.9 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.
17
Direct Registered Offerings
In February 2018, the Company entered into a securities purchase agreement pursuant to which it sold (i) 4,090,000 shares of its common stock; (ii) 3,000,581 shares of its Series A convertible preferred stock and (iii) warrants to purchase 1,418,116 shares of its common stock, or the 2018 Offering Warrants, for total gross proceeds of $59.1 million, or the March 2018 Direct Registered Offering. The March 2018 Direct Registered Offering was closed on March 5, 2018. The 2018 Offering Warrants have an exercise price of $8.31 per share, became exercisable upon issuance and expire in March 2025.
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 (i) 4,602,506 shares of its common stock and (ii) warrants that provide the warrant holders 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 an 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.
In January 2017, the Company completed the final closing of a private placement offering, or the 2017 Private Placement, through which it sold (i) 8,602,589 shares of its common stock and (ii) warrants that provide the warrant holders the right to purchase 1,720,512 shares of its common stock, or the 2017 Placement Warrants, and raised total gross proceeds of $26.1 million. The 2017 Placement Warrants have an exercise price of $3.17 per share, became exercisable in July 2017 and expire in January 2024.
At-The-Market Offering of Common Stock
In January 2017, the Company filed a shelf registration statement on Form S-3 with the SEC, which included a base prospectus covering the offering, issuance and sale of up to a maximum aggregate offering of $75.0 million of the Company’s common stock, preferred stock, debt securities, warrants, purchase contracts and/or units. In January and April 2017, the Company agreed to sell up to a cumulative $50.0 million of its common stock in accordance with the terms of a sales agreement with FBR Capital Markets & Co., pursuant to an at-the-market offering program in accordance with Rule 415(a)(4) under the Securities Act. In January 2019, the Company filed a registration statement with the SEC which covers the offering, issuance and sale of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units, including up to $100.0 million of the Company’s common shares pursuant to the Company’s at-the-market offering program with FBR.
As of September 30, 2019, the Company has sold approximately $40.4 million under this at-the-market offering program. During the nine months ended September 30, 2018, the Company sold approximately $0.3 million under this at-the-market offering program.
Equity Classified Common Stock Warrants
In connection with a debt financing in December 2013, the Company issued warrants to purchase 128,231 shares of its common stock with an exercise price of $5.84 per share. These warrants were exercised during the three months ended September 30, 2019 and the Company issued 36,457 shares of its common stock upon the net exercise of the 128,231 warrants. None of these warrants remained outstanding at September 30, 2019.
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 the 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. The 2015 Placement Warrants are exercisable at any time at the option of the holder until the five-year anniversary of its date of issuance. Prior to September 30, 2019, the Company issued 92,487 shares of its common stock upon the net exercise of 159,010 shares of the 2015 Placement Warrants. The remaining 39,750 shares of the 2015 Placement Warrants have not been exercised and remained outstanding at September 30, 2019.
In connection with the March 2018 Direct Registered Offering, the Company issued warrants to purchase 1,418,116 shares of common stock at an exercise price of $8.31 per share, or the 2018 Offering Warrants. The 2018 Offering Warrants became exercisable upon issuance and expire in March 2025. None of the 2018 Offering Warrants have been exercised to date and they all remained outstanding at September 30, 2019.
18
As separate classes of securities were issued in a bundled transaction, the gross proceeds from the March 2018 Direct Registered Offering of $59.1 million was allocated to common stock, Series A convertible preferred stock and the 2018 Offering Warrants based on their respective relative fair value upon issuance. The aggregate fair value of the 2018 Offering Warrants of $7.4 million was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected term of seven years, expected volatility of 62.5%, risk-free interest rate of 2.8% and expected dividend yield of 0%. The allocated proceeds from the 2018 Offering Warrants of $6.6 million was recorded in additional paid-in-capital.
Liability Classified Common Stock Warrants
In connection with private placement offerings in 2017 and 2016, the Company issued common stock warrants, or the 2017 and 2016 Placement Warrants, which contain protection whereby the warrant holders will have the right to receive cash in the amount equal to the Black-Scholes value of the warrants upon the occurrence of a Change of Control, as defined in the 2017 and 2016 Placement Warrants. The 2017 and 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 and comprehensive loss. The key terms of the 2017 and 2016 Placement Warrants are as follows:
|
|
Issuance Date
|
|
Term
|
|
Exercise Price Per Share
|
|
|
Warrants Exercised during the Nine Months Ended September 30, 2019
|
|
|
Warrants Outstanding at September 30, 2019
|
|
2017 Placement Warrants
|
|
January 2017
|
|
7 years
|
|
$
|
3.17
|
|
|
|
90,642
|
|
|
|
1,618,890
|
|
2016 Placement Warrants
|
|
August and September 2016
|
|
7 years
|
|
$
|
2.95
|
|
|
|
593,352
|
|
|
|
537,263
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
683,994
|
|
|
|
2,156,153
|
|
During the three and nine months ended September 30, 2019, the Company recorded a gain of $13.5 million and a gain of $8.6 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. During the three and nine months ended September 30, 2018, the Company recorded a loss of $6.7 million and a gain of $0.4 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. The fair value of the 2016 and 2017 Placement Warrants at September 30, 2019 and December 31, 2018, respectively, was estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions:
|
|
2017 Placement Warrants
|
|
|
2016 Placement Warrants
|
|
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
|
September 30, 2019
|
|
|
December 31,
2018
|
|
Expected term (in years)
|
|
|
4.3
|
|
|
|
5.1
|
|
|
3.9
|
|
|
|
4.7
|
|
Expected volatility
|
|
67.9%
|
|
|
60.8%
|
|
|
67.3%
|
|
|
60.9%
|
|
Risk-free interest rate
|
|
1.6%
|
|
|
2.5%
|
|
|
1.6%
|
|
|
2.5%
|
|
Expected dividend yield
|
|
0%
|
|
|
0%
|
|
|
0
|
|
|
0%
|
|
19
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, 2018
|
|
|
1,908,626
|
|
|
|
11,603,708
|
|
|
$
|
6.64
|
|
|
|
7.6
|
|
|
$
|
10,151
|
|
Additional options authorized
|
|
|
3,853,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(2,624,505
|
)
|
|
|
2,624,505
|
|
|
|
8.19
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
—
|
|
|
|
(2,219,251
|
)
|
|
|
4.34
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
553,585
|
|
|
|
(553,585
|
)
|
|
|
6.73
|
|
|
|
|
|
|
|
|
|
Withheld shares to pay for taxes on RSU released shares
|
|
|
253,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs granted
|
|
|
(708,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs canceled
|
|
|
70,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
3,307,560
|
|
|
|
11,455,377
|
|
|
$
|
7.58
|
|
|
|
7.9
|
|
|
$
|
1,011
|
|
Vested and exercisable at September 30, 2019
|
|
|
|
|
|
|
4,575,393
|
|
|
$
|
6.25
|
|
|
|
6.2
|
|
|
$
|
1,010
|
|
Vested and expected to vest at September 30, 2019
|
|
|
|
|
|
|
10,793,250
|
|
|
$
|
7.38
|
|
|
|
7.7
|
|
|
$
|
1,010
|
|
The weighted-average grant date fair value of options granted to employees were $4.71 and $5.02 per share during the nine months ended September 30, 2019 and 2018, respectively. The grant date fair values of options vested were $11.4 million and $4.3 million during the nine months ended September 30, 2019 and 2018, 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 values of options exercised were $7.8 million and $11.6 million during the nine months ended September 30, 2019 and 2018, respectively.
At September 30, 2019, total unrecognized compensation cost related to stock options granted to employees, net of estimated forfeitures, was $29.0 million which is expected to be recognized over a weighted-average period of 2.9 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.
The fair value of employee stock options is estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected volatility%
|
|
60.7%
|
|
|
60.4%
|
|
Risk-free interest rate%
|
|
2.4%
|
|
|
2.8%
|
|
Expected dividend yield%
|
|
|
0.0%
|
|
|
|
0.0%
|
|
20
Restricted Stock Units
From time to time, the Company grants Restricted Stock Units, or RSUs, to its Board of Directors and certain employees for their services. The RSUs granted to board members are either fully vested upon issuance or vest over a period of time from the grant date and will be released and settled upon termination of the board member’s services or the occurrence of a change in control event. In January 2019, the Company granted RSUs to its Board of Directors as part of the director compensation program. In March 2019, the Company began granting RSUs to certain employees. These RSUs vest in equal annual installments over either two or three years from the grant date and are subject to the participants continuing service to the Company over that period. The fair value of RSUs is based on the closing market price of the Company’s common stock on the grant date.
|
|
RSUs
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Unvested at December 31, 2018
|
|
|
1,736,234
|
|
|
$
|
9.65
|
|
|
RSUs granted
|
|
|
708,144
|
|
|
|
7.79
|
|
|
RSUs vested
|
|
|
(631,252
|
)
|
|
|
9.40
|
|
|
Unvested at September 30, 2019
|
|
|
1,813,126
|
|
|
$
|
9.13
|
|
|
Vested and unreleased
|
|
|
104,173
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
1,917,299
|
|
|
|
|
|
|
The total grant date fair value of RSUs awarded was $5.5 million for the nine months ended September 30, 2019. The total fair value of RSUs vested was $5.9 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2019, the RSUs that vested were net share settled such that the Company withheld shares with value equivalent to the employees’ obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total shares withheld were approximately 0.3 million and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. Total payments for the employees’ tax obligations to taxing authorities were $2.4 million for the nine months ended September 30, 2019 and are reflected as a financing activity within the Condensed Consolidated Statement of Cash Flows. These net share settlements reduced the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. For the nine months ended September 30, 2018, the Company granted 1.8 million shares of RSUs and recorded $1.2 million in stock-based compensation expense related to the issuance of RSUs.
As of September 30, 2019, total unrecognized stock-based compensation cost related to RSUs was $12.7 million, which is expected to be recognized over a weighted-average period of 1.9 years. As of September 30, 2019, 1,617,702 RSUs are expected to vest.
Stock-Based Compensation Expense
Total stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and comprehensive loss is classified as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
377
|
|
|
$
|
511
|
|
|
$
|
1,221
|
|
|
$
|
1,061
|
|
Selling and marketing
|
|
|
368
|
|
|
|
234
|
|
|
|
980
|
|
|
|
555
|
|
General and administrative
|
|
|
4,165
|
|
|
|
6,434
|
|
|
|
12,168
|
|
|
|
8,436
|
|
Total stock-based compensation expense
|
|
$
|
4,910
|
|
|
$
|
7,179
|
|
|
$
|
14,369
|
|
|
$
|
10,052
|
|
During the three and nine months ended September 30, 2019 and 2018, there was no stock-based compensation expense capitalized as a component of inventory or recognized in cost of revenue. Stock-based compensation relating to stock-based awards granted to consultants was insignificant during the three and nine months ended September 30, 2019 and 2018.
21
Due to the current operating losses, the Company recorded zero income tax expense during the nine months ended September 30, 2019 and 2018, respectively. During these periods, the Company’s activities were limited to U.S. federal and state tax jurisdictions, as it does not have any significant foreign operations. The federal and state effective tax rate before valuation allowance is approximately 24% for the nine months ended September 30, 2019.
Due to the Company’s history of cumulative losses and after considering all the available objective evidence, management concluded that 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 include net operating loss, or NOL, carryforwards and tax credits related primarily to research and development, continue to be subject to a valuation allowance as of September 30, 2019. The Company expects to 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 benefits of $2.1 million and $1.6 million at September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018, there were no accrued interest and penalties related to uncertain tax positions.
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Series A convertible preferred stock (if converted)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
494,601
|
|
Options to purchase common stock
|
|
|
11,350,034
|
|
|
|
11,769,686
|
|
|
|
10,613,157
|
|
|
|
10,028,174
|
|
Common stock warrants
|
|
|
3,866,555
|
|
|
|
4,694,837
|
|
|
|
4,200,541
|
|
|
|
4,441,885
|
|
Restricted stock units
|
|
|
437,933
|
|
|
|
1,457,638
|
|
|
|
1,206,267
|
|
|
|
576,464
|
|
Total
|
|
|
15,654,522
|
|
|
|
17,922,161
|
|
|
|
16,019,965
|
|
|
|
15,541,124
|
|
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, with a minimum $0.1 million royalty payment per quarter, from sales of products developed and sold by the Company utilizing the licensed patents. Minimum royalty payments in any calendar year are credited against earned royalties for such calendar year. Royalty expenses based on 1% of net sales were $0.6 million and $0.5 million during the nine months ended September 30, 2019 and 2018, respectively, and were recorded as product cost of revenue.
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