ACCURAY INC (ARAY)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward‑looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form 10‑K, particularly in “Risk Factors.” See “Special Note Regarding Forward‑Looking Statements” for more information. This section generally discusses the results of our operations for the year ended June 30, 2024, compared to the year ended June 30, 2023. For a discussion of the year ended June 30, 2023 compared to the year ended June 30, 2022, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC on September 7, 2023.

Overview

Company

Accuray Incorporated is a radiation therapy company that develops, manufactures, sells and supports market-changing solutions that are designed to deliver radiation treatments for even the most complex cases, while making commonly treatable cases even more straightforward, to meet the full spectrum of patient needs. We believe in comparison to conventional linear accelerators, our treatment delivery, planning, and data management solutions provide better accuracy, flexibility, and control; fewer treatments with shorter treatment times; and the technology to expand beyond cancer, making it easier for clinical teams around the world to provide treatments that help patients get back to living their lives, faster.

Our innovative technologies, the CyberKnife® and TomoTherapy® platforms, including the Radixact® System, our next generation TomoTherapy platform, are designed to deliver advanced treatments, including stereotactic radiosurgery (“SRS”), stereotactic body radiation therapy (“SBRT”), intensity modulated radiation therapy (“IMRT”), image-guided radiation therapy (“IGRT”), and adaptive radiation therapy (“ART”). The CyberKnife and TomoTherapy platforms have complementary clinical applications with the same goal: to empower our customers to deliver the most precise and accurate treatments while still minimizing dose to healthy tissue, helping to reduce the risk of side effects that may impact patients’ quality of life. Each of these systems serves patient populations treated by the same medical specialty, radiation oncology, with advanced capabilities. The CyberKnife platform is also used by neurosurgeons specializing in radiosurgery to treat patients with tumors in the brain and spine, and neurologic and/or endocrine disorders. In addition to these products, we also provide services, which include post-contract customer support (warranty period services and post-warranty services), installation services, training, and other professional services.

Current Economic Conditions

We are subject to risks and uncertainties caused, directly or indirectly, by events with significant geopolitical and macroeconomic impacts, including, but not limited to, inflation; actions taken to counter inflation, including rising interest rates; foreign currency exchange rate fluctuations; uncertainty and volatility in the banking and financial services sector; tightening credit markets; geopolitical concerns, such as the Russian-Ukraine and Israel-Hamas conflicts and increasing tension between China and the U.S., including with respect to Taiwan; uncertainty caused by the China anti-corruption campaign and timing of the China stimulus program; the upcoming U.S. presidential election; as well as other factors that may emerge. In particular, we are continuing to navigate supply chain and inflation challenges and adverse foreign currency exchange rate fluctuations, all of which continues to have a negative impact on our results of operations.

68

Table of Contents

We expect that our customers’ business and our business will continue to be adversely impacted, directly or indirectly, by these macroeconomic and geopolitical issues. Delays in deliveries and installations that originated from the COVID-19 pandemic as well as its effects on the global economic environment have occurred and are expected to continue, to some degree, through the remainder of calendar year 2024, which could have a negative impact on our revenue during such period. Inflation and the ongoing supply chain challenges and logistics costs have materially affected our gross margins and net income (loss), and we expect that gross margins and net income (loss) will continue to be adversely affected by increased material costs and freight and logistic expenses through at least the remainder of calendar year 2024, and potentially longer. In addition, reduced budgets and lower capital deployment priority for radiotherapy equipment, along with longer customer installation timelines, in the United States have negatively impacted our revenue during fiscal year 2024, and we expect this will continue to have an impact through fiscal year 2026. The extent of the ongoing impact of these macroeconomic events on our business, our markets and on global economic activity however, is uncertain and the related financial impact cannot be reasonably estimated with any certainty at this time.

Our past results may not be indicative of our future performance, and historical trends including conversion of backlog to revenue, income (loss) from operations, net income (loss), net income (loss) per share and cash flows may differ materially. Accordingly, management is carefully evaluating our liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near-term financial performance as the uncertainty related to these factors continues to unfold. We also continue to evaluate our operating expenses, including our real estate needs and continue to assess our operations and how and to what extent we will continue to utilize our current real estate assets. The risks related to our business, including further discussion of the impact and possible future impacts of current economic conditions on our business, are further described in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Sale of Our Products

Generating revenue from the sale of our platforms is a lengthy process. Selling our platforms, from first contact with a potential customer to a signed sales contract that meets our backlog criteria (as discussed below) varies significantly and generally spans between six months and 30 months. The length of time between receipt of a signed contract and revenue recognition is generally governed by the time required by the customer to build, renovate or prepare the treatment room for installation of the platform. We report our customer revenues in four geographic regions: the Americas, EIMEA, Asia Pacific and Japan. The Americas region includes the United States, Canada and Latin America. The EIMEA region includes Europe, India, the Middle East and Africa. The Asia Pacific region consists of Asia, Australia and New Zealand.

In the United States, we primarily market directly to customers, including hospitals and stand-alone treatment facilities, through our sales organization we also market to customers through sales agents and group purchasing organizations. Outside the United States, we market to customers directly and through use of distributors and sales agents. In addition to our offices in the United States, we have international offices in Morges, Switzerland; Hong Kong, China; Shanghai, China and Tokyo, Japan and direct sales staff in most countries in Western Europe, Japan, India and Canada. In addition, we have distributors in Europe, Russia, the Middle East, Africa, the Asia Pacific region, and Latin America.

Joint Venture

In January 2019, our wholly-owned subsidiary, Accuray Asia Limited (“Accuray Asia”), entered into an agreement with CNNC High Energy Equipment (Tianjin) Co., Ltd. (the “CIRC Subsidiary”), a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture, CNNC Accuray (Tianjin) Medical Technology Co. Ltd. (the “JV”), to manufacture and sell radiation oncology systems in China. The JV aims to be uniquely positioned to serve China, which we believe is the world’s largest growth market for radiation oncology systems. China represents a significantly underserved market for linacs based on the country’s population and cancer incidence rates on both an absolute and relative country basis. Accuray Asia has a 49% ownership interest in the JV and the CIRC Subsidiary has a 51% ownership interest in the JV.

With the receipt of the necessary permits and licenses to operate, the JV has begun selling products in China, much like a distributor. The JV has recently begun to manufacture and sell a locally branded “Made in China” radiotherapy device, the Tomo C radiation therapy system, in the Class B license category. We believe this strategy will allow us to best maximize both near and longer-term opportunities in China. In September 2023, we received approval for our Class B device from the National Medical Products Administration (“NMPA”) and our Accuray Precision Treatment Planning System for the Class B

69

Table of Contents

device was approved by the NMPA in June 2024. The JV also distributes other Accuray treatment delivery systems like the Radixact and CyberKnife treatment delivery systems.

Restructuring

On October 25, 2023, we informed affected employees of a cost savings initiative (the “2024 restructuring initiative”) to reduce operating costs resulting in the elimination of approximately 5.9 percent of our global workforce. In the year ended June 30, 2024, we incurred restructuring charges of $2.6 million. These charges are cash-based and are primarily related to severance expenses and other one-time termination benefits. We recorded the restructuring charges of the affected employees in their respective department cost center. The restructuring charges recorded during the year ended June 30, 2024 are as follows: cost of sales $0.2 million, research and development $1.7 million, sales and marketing $0.1 million, and general and administrative $0.6 million. At June 30, 2024, we have completed the 2024 restructuring initiative.

Backlog

In order for the product portion of a system sales agreement to be included in backlog, it must meet the following criteria:

•
The contract is properly executed by both the customer and us. A customer purchase order that incorporates the terms of our contract quote will be considered equivalent to a signed and executed contract. The contract has either cleared all its contingencies or contained no contingencies when signed;

•
We have received a minimum deposit or a letter of credit; or the sale is to a customer where a deposit is deemed not necessary or customary (i.e., sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, customers with trade-in of existing equipment, sales via tender awards, or indirect channel sales that have signed contracts with end-customers);

•
The specific end-customer site has been identified by the customer in the written contract or written amendment; and

•
Less than 30 months have passed since the contract met all the criteria above.

Our backlog includes contractual agreements with our customers for the purchase of our CyberKnife or TomoTherapy platforms, including the Radixact Systems and related upgrades. The amount of backlog recognized into revenue is primarily impacted by three items: cancellations, age-outs and age-ins, and foreign currency fluctuations. We cannot provide assurance that we will convert backlog into recognized revenue, primarily due to factors outside of our control, such as:

•
Orders could be cancelled for reasons such as, changes in customers’ priorities or financial condition, changes in government or health insurance reimbursement policies, or changes to regulatory requirements. Cancellations are outside of our control and are difficult to forecast; however, we continue to work closely with our customers to minimize the impact of cancellations on our business;

•
Orders are considered aged-out and removed from reported backlog if we have not been able to recognize revenue on an agreement after 30 months. Agreements may age-out for many reasons, including but not limited to, the inability of the customer to pay, the inability of the customer to adapt their facilities to accommodate our products in a timely manner, or the inability to timely obtain licenses necessary for customer facilities or operation of our equipment. Age-ins represent orders that previously aged-out but have been recognized as revenue in the current period; and

•
Orders include amounts not denominated in U.S. Dollars and therefore, fluctuations in the U.S. Dollar as compared to other currencies will impact revenue. Generally, strengthening of the U.S. Dollar will negatively impact revenue. Backlog is stated at historical foreign currency exchange rates, and revenue is released from backlog at current exchange rates, with any difference recorded as a backlog adjustment.

70

Table of Contents

A summary of gross orders, net orders, and order backlog is as follows (in thousands):

Gross Orders and Book to Bill Ratio

Gross orders are defined as the sum of new orders recorded during the period, adjusted for any revisions to existing orders during the period.

Gross orders increased by $31.1 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to a $34.3 million increase in CyberKnife System gross orders and upgrades partially offset by a $3.2 million decrease in TomoTherapy System gross orders and upgrades. The increase in gross orders were primarily due to an increase in system gross orders from the EIMEA region and Latin America.

Our book to bill ratio is defined as gross orders for the period divided by product revenue for the period. Our book to bill ratio for the year ended June 30, 2024, was 1.5 as compared to 1.3 for the year ended June 30, 2023. A book-to-bill ratio greater than 1.2 indicates strong demand for our products. This metric allows management to monitor our business development efforts to ensure we grow our backlog and our business over time.

In recent years, the percentage of gross orders received from our distribution partners in the international markets represented 74%, 76%, and 71% of gross orders for fiscal year ended June 30, 2024, 2023 and 2022, respectively. We anticipate that distributor orders from international markets will continue to represent a significant portion of our gross orders in the foreseeable future. International orders are affected by foreign currency fluctuation as well as government programs that stimulate the purchase of healthcare products, both of which could affect the demand for our products and timing of orders from period to period. In addition, our order-to-revenue conversion cycle for international distributor orders has been generally longer, compared to that of direct channel sales and could cause fluctuations in our age-outs from period to period.

Net Orders

Net orders are defined as gross orders, less cancellations, age-outs net of age-ins, foreign exchange and other adjustments during the period.

Net orders increased by $28.0 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to an increase in gross orders partially offset by unfavorable foreign exchange rate fluctuations.

71

Table of Contents

Results of Operations

Fiscal 2024 results compared to fiscal 2023

Net revenue

Net revenue by sales classification is as follows:

a)
Includes sales of products to the JV, an equity method investment, of $77,497 during the year ended June 30, 2024, $55,658 during the year ended June 30, 2023, and $45,545 during the year ended June 30, 2022, respectively. See Note 11.

b)
Includes sales of services to the JV, an equity method investment, of $15,039 during the year ended June 30, 2024, $10,919 during the year ended June 30, 2023, and $10,332 during the year ended June 30, 2022, respectively. See Note 11.

c)
The year ended June 30, 2024 includes revenue from certain upgrades that were recorded in services net revenue during the years ended June 30, 2023 and June 30, 2022.

Products net revenue increased by $1.0 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, mostly driven by a higher average sale price per unit and certain upgrades, partially offset by lower volume of shipments of system units of our TomoTherapy System and CyberKnife System. Products net revenue was negatively impacted by reduced budgets and lower capital deployment priority for radiotherapy equipment, along with longer customer installation timelines, in the Americas region during fiscal year 2024, and we expect this will continue to have an impact through fiscal year 2026.

Services net revenue decreased by $2.0 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to a $10.5 million decrease in revenue from the purchase of spare parts from customers, lower installation activity and systems activation at customer locations and certain upgrades, partially offset by a $8.5 million increase in revenue from service contracts as a result of an increase in our installed base.

Net revenue by geographic region, which is based on the shipping location of our customer, is as follows:

Net revenue decreased $1.1 million during the year ended June 30, 2024, as compared to the same period in the prior fiscal year primarily due to a lower volume of shipment of systems and service revenues from the Americas region, mostly offset by increase in the volume of shipment of systems from China as well as India and the Middle East within our EIMEA region. During the year ended June 30, 2024, Japan net revenue included a $4.9 million unfavorable impact from foreign currency exchange rate fluctuations and EIMEA net revenue had a $4.2 million favorable impact from foreign currency exchange rate fluctuations. Products net revenue was negatively impacted by reduced budgets and lower capital deployment priority for radiotherapy equipment, along with longer customer installation timelines, in the Americas region during fiscal year 2024, and we expect this will continue to have an impact through fiscal year 2026.

72

Table of Contents

Gross profit

Gross profit by sales classification is as follows:

Gross profit decreased by $11.0 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, due to an increase of $6.2 million in service parts consumption which was partially from a supplier quality issue in fiscal year 2024, and a $4.1 million increase in the net deferred profit margin on sales to the JV.

Operating Expenses

Research and development expenses decreased by $7.4 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to a $5.0 million decrease in compensation and benefit costs as a result of lower headcount from the 2024 restructuring initiative in the second quarter of fiscal year 2024 and lower bonus compensation expense in fiscal year 2024.

Selling and marketing expenses decreased by $3.6 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to $2.7 million in lower compensation and benefit costs as a result of the restructuring initiative in fiscal year 2023 and lower bonus compensation expense in fiscal year 2024, and a $0.6 million decrease in consulting costs due to cost-cutting efforts, partially offset by a $0.4 million increase in trade show expenses.

General and administrative expenses increased by $1.8 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to an increase of $2.9 million in support consulting costs and $1.4 million in amortization expenses, both related to the implementation of our enterprise resource planning system in the first quarter of fiscal year 2024, a $1.3 million increase in facility expenses, a $0.6 million increase in legal and accounting expenses, and a $0.5 million increase in travel expenses, which were partially offset by $3.0 million decrease in compensation and benefit costs due to lower bonus compensation and stock-based compensation expenses in fiscal year 2024, and a decrease in bad debt expense due to a $2.0 million bad debt reserve for a specific customer recorded in the fourth quarter of fiscal year 2023.

Income on equity method investment

73

Table of Contents

Income on equity method investment decreased by $0.7 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to the JV having higher operating expenses, partially offset by an increase in the JV service revenue.

Interest expense

Interest expense increased $1.0 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to higher interest rates on the outstanding balances on our Credit Facilities.

Other expense, net

Other expense, net, increased by $1.4 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily driven by foreign currency transaction losses.

Provision for income taxes

Provision for income taxes increased by $1.2 million during the year ended June 30, 2024, as compared to the year ended June 30, 2023, primarily due to an increase in foreign earnings and deferred tax liability on unremitted foreign earnings.

Liquidity and Capital Resources

At June 30, 2024, we had $68.6 million in cash and cash equivalents. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, macroeconomic conditions, inflation, actions taken to counter inflation, foreign currency exchange rate fluctuations, instability in the banking sector and the risks included in Part I, Item 1A titled “Risk Factors.” In particular, we expect inflation and the ongoing supply chain challenges and logistics costs to impact our cash from operations through at least the remainder of calendar year 2024, if not longer. Based on our cash and cash equivalents balance, available debt facilities, current business plan and revenue prospects, we believe we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months. However, we continue to critically review our liquidity and anticipated capital requirements in light of the significant uncertainty created by macroeconomic conditions.

On October 25, 2023, we informed affected employees of the 2024 restructuring initiative. During the year ended June 30, 2024, we incurred a charge of $2.6 million. As of June 30, 2024, we have completed the 2024 restructuring initiative.

Our liquidity and cash flows have been and could continue to be materially impacted by current macroeconomic factors, including facility closures, supply chain disruptions, inflation, foreign currency exchange rate fluctuations, increased volatility in the financial markets, uncertainty caused by the China anti-corruption campaign and timing of the China stimulus program, the upcoming U.S. presidential election, instability in the banking sector, tightening of credit markets which could

74

Table of Contents

impact debt availability. These factors have and could continue to negatively impact our business operations and cash flows for the foreseeable future, including reductions in revenue, decreases in gross margin and delays in payments from customers, as well as declines or delays in the conversion of backlog to revenue. Certain of our revenue may not be collectible to the extent our customers suffer financial difficulty and, in fiscal 2023, we increased our bad debt reserve to account for potentially uncollectible revenue. For example, in the United States, one customer declared bankruptcy in fiscal 2023 causing us to increase our bad debt reserve due to the expectation that they will be unable to pay us. Accordingly, there remain uncertainties as to how the current macroeconomic environment will impact our business, results of operations, access to sources of liquidity and financial condition in the future. As a result, we are unable to predict with certainty the impacts of these factors on our ability to maintain compliance with the financial covenants contained in the credit and security agreements related to our credit facilities.

In May 2021, we issued $100.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2026 under an indenture between us and The Bank of New York Mellon Trust Company, N.A., as trustee. Concurrently, with the issuance of the notes, in May 2021, we entered into a senior secured credit agreement with Silicon Valley Bank, individually as a lender and agent, and the other lenders (the “Existing Credit Agreement”), which provides for a five-year $80 million term loan facility (the "Term Loan Facility") and a $40 million revolving credit facility (the “Revolving Credit Facility”). As of June 30, 2024, we had an outstanding balance under the Term Loan Facility of $64.0 million and Revolving Credit Facility of $10.0 million. During the year ended June 30, 2024, the weighted average effective interest rate on the Term Loan Facility was 8.6% and weighted average effective interest rate on the Revolving Credit Facility, including the unused commitment fee, was 9.5%. See Note 9, "Debt" to the Notes to the consolidated financial statements for further information regarding the Existing Credit Agreement and 3.75% Convertible Senior Notes due 2026. Also see Note 8, "Commitments and Contingencies" to the Notes to the consolidated financial statements for further information regarding our cash commitments related to our debt.

We may also experience other, unexpected impacts to our business, including matters discussed in the Part I, Item 1A titled “Risk Factors.” While we were in compliance with such covenants for the period ended June 30, 2024, failure to meet the covenant requirements in the future could cause us to be in default and the maturity of the related debt could be accelerated and become immediately payable. These restrictions could adversely affect our ability to finance our future operations or capital needs, withstand a future downturn in our business or the economy in general, engage in business activities, including future opportunities that may be in our interest, and plan for or react to market conditions or otherwise execute our business strategies. Our ability to comply with the covenants and other terms governing the Credit Facilities will depend in part on our future operating performance. In addition, because substantially all of our assets are pledged as a security under the Credit Facilities, if we are not able to cure any default or repay outstanding borrowings, such assets are subject to the risk of foreclosure by our lenders. This may require us to obtain waivers or amendments to the credit and security agreement in order to maintain compliance and there can be no certainty that any such waiver or amendments will be available, or what the cost of such waiver or amendment, if obtained, would be. For example, in April 2024, the Company entered into the Third Amendment (the “ Third Amendment”) to the Existing Credit Agreement to update the calculation of Consolidated EBITDA (as defined in the Existing Credit Agreement) to maintain compliance with the debt covenants as of March 31, 2024. If we are unable to obtain necessary waivers or amendment and the debt under such credit facility is accelerated, we would be required to obtain replacement financing at prevailing market rates, which may not be favorable to us. There is no guarantee that we would be able to satisfy our obligations if any of our indebtedness is accelerated.

Additionally, the undistributed earnings of our foreign subsidiaries at June 30, 2024, for all countries except Japan, France, Switzerland and the United Kingdom are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise. Future repatriation of our foreign earnings could be subject to income taxes. As of June 30, 2024, we had $9.5 million of cash and cash equivalents at our foreign subsidiaries. If such funds were repatriated, there will be additional foreign tax withholdings imposed, depending on the country from which the funds were repatriated.

75

Table of Contents

Cash Flows

Cash Flows From Operating Activities

Net cash used in operating activities was $11.9 million during the year ended June 30, 2024, resulting primarily from a $21.9 million decrease from the net changes in assets and liabilities, and a net loss of $15.5 million offset by a $25.6 million increase in non-cash items.

•
Non-cash items primarily consisted of share-based compensation expense of $9.5 million, provision for inventories write-down of $6.0 million, depreciation and amortization expense of $5.9 million, and a $4.1 million increase in the net deferred profit margin on sales to the JV, partially offset by income from our equity method investment of $1.8 million.

•
The major contributors to the decrease in net changes of assets and liabilities during the year ended June 30, 2024 were as follows: a $16.5 million decrease in accrued liabilities primarily due to the payment of value added tax payables and a decrease in accrued bonus compensation; a $15.8 million increase in accounts receivable primarily due to an increase in system sales during the fourth quarter of fiscal year 2024; a $6.6 million decrease in customer advances due to delivery of orders, a $4.0 million increase in inventories primarily due to increased costs for parts; a $2.5 million decrease in deferred revenue primarily due to the timing of revenue recognition, partially offset by a $17.4 million increase in accounts payable due to the timing of payments, and a $6.1 million decrease in prepaid and other assets primarily due to a decrease in value added tax receivables partially offset by a $2.5 million dividend receivable from our JV.

Cash Flows From Investing Activities

Net cash used in investing activities was $3.6 million during the year ended June 30, 2024, was due to the purchase of property and equipment.

Cash Flows From Financing Activities

Net cash used in financing activities was $4.0 million during the year ended June 30, 2024 and was due to the scheduled payment of $6.0 million of the principal amount outstanding on our Term Loan Facility partially offset by $2.2 million in proceeds from the issuance of common stock to employees from employee stock plans. We borrowed $5.0 million on our Revolving Credit Facility in May 2024, and then repaid the $5.0 million in June 2024.

Operating Capital and Capital Expenditure Requirements

Our future capital requirements depend on numerous factors. These factors include but are not limited to the following:

•
Revenue generated by sales of our products and service plans;

•
Our ability to generate cash flows from operations;

•
Costs associated with our sales and marketing initiatives and manufacturing activities;

•
Facilities, equipment and IT systems required to support current and future operations;

•
Rate of progress and cost of our research and development activities;

76

Table of Contents

•
Costs of obtaining and maintaining FDA and other regulatory clearances of our products;

•
Effects of competing technological and market developments;

•
Number and timing of acquisitions and other strategic transactions;

•
Servicing and maturity of our current future indebtedness, including interest rates;

•
The implementation of our cost savings initiatives, including the reduction of our workforce;

•
The impact of inflation on our expenses; and

•
The unpredictable impact of the macroeconomic environment, including on collections, supply chain, and logistics.

We believe that our current cash and cash equivalents balance will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If these sources of cash and cash equivalents are insufficient to satisfy our liquidity requirements, or we believe market conditions are favorable, we may seek to sell additional equity or debt securities or enter into additional credit facilities. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Operating and Capital Expenditure Requirements and Contractual Obligations

Our purchase commitments and obligations include all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which we have not received the goods or services and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our long-term material cash requirements include lease obligations. See Note 4, “Leases” to the Notes to the consolidated financial statements for further information.

Inflation

We experienced rising costs for certain materials, including increased logistics and duties costs that adversely affected our gross margins and net income (loss), and had a material effect on our business, financial condition and results of operations for fiscal years 2023 and 2024. We expect that gross margins and net income (loss) will continue to be adversely affected by increased material costs and freight and logistic expenses in fiscal year 2025 as we are unable to pass all of these increased costs to our customers. In addition, we expect inflation and the ongoing supply chain challenges and logistics costs to impact our cash from operations through at least the remainder of calendar year 2024, if not longer. Continued pressure from inflationary factors, such as further increases in the cost of materials for our products, cost of labor, interest rates, overhead costs, logistics and duties costs could further exacerbate these effects and harm our business, operating results, and financial condition.

77

Table of Contents

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. The economic uncertainty in the current environment however, could limit our ability to accurately make and evaluate our estimates and judgments. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.

All of our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 1, The Company and its Significant Accounting Policies, to the consolidated financial statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Management believes the critical accounting policies and estimates are those related to revenue recognition and the assessment of stand-alone selling price ("SSP"), allowance for credit losses, valuation of inventories, and the valuation of equity method investments.

Revenue Recognition and the Assessment of Stand-Alone Selling Price

Our revenue is primarily derived from new system and upgrade sales of CyberKnife and TomoTherapy platforms and services, which include post-contract customer support (“PCS”) contracts (warranty period services and post-warranty services), installation services, training and other professional services. We record our revenue net of any value-added or sales tax. We recognize revenue for certain performance obligations at the point in time when control is transferred, such as delivery of products and the right to use. We recognize 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. Payments received in advance of system shipment are recorded as customer advances and are deferred until product shipment when they are recognized in revenue. We assess the probability of collection based on a number of factors, including past payment history with the customer and creditworthiness of the customer. We generally do not request collateral from our customers but will request advance payments or letter’s of credit when deemed necessary.

We frequently enter into sales arrangements that contain multiple performance obligations. For sale arrangements that contain multiple performance obligations, we account 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. The SSP is determined based on observable prices at which we separately sell the products and services. If the SSP is not directly observable, then we will estimate the SSP considering market conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

Allowance for Credit Losses

We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. On no-less than a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for anticipated credit losses. If our evaluation of our customers’ financial conditions does not reflect our future ability to collect all outstanding receivables, additional provisions may be needed and our operating results could be negatively affected.

Valuation of Inventories

The valuation of inventory requires us to estimate obsolete or excess inventory as well as damaged inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. We regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand to support future sales and service. If our demand forecast for specific products is greater than

78

Table of Contents

actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could be required to write off inventory beyond the current reserve, which would negatively impact our gross margin.

Valuation of Equity Method Investments

We have an equity method investment in CNNC Accuray (Tianjin) Medical Technologies Co. Ltd., our joint venture in China. Our equity method investment is held at cost and adjusted for impairment when it would be deemed to be impaired. We monitor this investment for events or circumstances indicative of a potential impairment, and we make appropriate reductions in carrying value if we determine that an impairment charge is required, based primarily on the financial condition or near term prospects of the investee.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward‑looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form 10‑K, particularly in “Risk Factors.” See “Special Note Regarding Forward‑Looking Statements” for more information. This section generally discusses the results of our operations for the year ended June 30, 2023, compared to the year ended June 30, 2022. For a discussion of the year ended June 30, 2022 compared to the year ended June 30, 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended June 30, 2022, as filed with the SEC on August 17, 2022.

Overview

Company

Accuray Incorporated is a radiation therapy company that develops, manufactures, sells and supports market-changing solutions that are designed to deliver radiation treatments for even the most complex cases, while making commonly treatable cases even more straightforward, to meet the full spectrum of patient needs. We believe in comparison to conventional linear accelerators, our treatment delivery, planning, and data management solutions provide better accuracy, flexibility, and control; fewer treatments with shorter treatment times; and the technology to expand beyond cancer, making it easier for clinical teams around the world to provide treatments that help patients get back to living their lives, faster.

Our innovative technologies, the CyberKnife® and TomoTherapy® platforms, including the Radixact® System, our next generation TomoTherapy platform, are designed to deliver advanced treatments, including stereotactic radiosurgery (“SRS”), stereotactic body radiation therapy (“SBRT”), intensity modulated radiation therapy (IMRT), image-guided radiation therapy (“IGRT”), and adaptive radiation therapy (“ART”). The CyberKnife and TomoTherapy platforms have complementary clinical applications with the same goal: to empower our customers to deliver the most precise and accurate treatments while still minimizing dose to healthy tissue, helping to reduce the risk of side effects that may impact patients’ quality of life. Each of these systems serves patient populations treated by the same medical specialty, radiation oncology, with advanced capabilities. The CyberKnife platform is also used by neurosurgeons specializing in radiosurgery to treat patients with tumors in the brain and spine, and neurologic and/or endocrine disorders. In addition to these products, we also provide services, which include post-contract customer support (warranty period services and post-warranty services), installation services, training, and other professional services.

Current Economic Conditions

We are subject to risks and uncertainties caused by events with significant macroeconomic impacts, including, but not limited to, rising inflation, actions taken to counter inflation, including rising interest rates, foreign currency exchange rate fluctuations, instability in the banking sector, the COVID-19 pandemic, and geopolitical concerns, such as the Russian invasion of Ukraine and increasing tension between China and the U.S., including with respect to Taiwan. We are also continuing to navigate supply chain and inflation challenges and foreign exchange, all of which continues to have a negative impact on our results of operations.

We expect that our customers’ business and our business will continue to be adversely impacted, directly or indirectly, by macroeconomic and geopolitical issues, including supply chain issues, inflation, labor, foreign currency exchange rate fluctuations, uncertainty and volatility in the banking and financial services sector, tightening credit markets, the effects of

65

Table of Contents

the COVID-19 related restrictions, and other factors that may emerge. In addition, rising inflation and the ongoing supply chain challenges and attendant heightened logistics costs have materially affected our gross margins and net income (loss), and we expect that gross margins and net income (loss) will continue to be adversely affected by increased material costs and freight and logistic expenses through at least fiscal year 2024, if not longer. The extent of the ongoing impact of these macroeconomic events on our business, our markets and on global economic activity however, is uncertain and the related financial impact cannot be reasonably estimated with any certainty at this time. Our past results may not be indicative of our future performance, and historical trends including conversion of backlog to revenue, income (loss) from operations, net income (loss), net income (loss) per share and cash flows may differ materially. Accordingly, management is carefully evaluating our liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near-term financial performance as the uncertainty related to these factors continues to unfold. We also continue to evaluate our operating expenses, including our real estate needs and continue to assess our operations and how and to what extent we will continue to utilize our current real estate assets. The risks related to our business, including further discussion of the impact and possible future impacts of the current economic conditions on our business and the COVID-19 pandemic, are further described in the section titled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Sale of Our Products

Generating revenue from the sale of our platforms is a lengthy process. Selling our platforms, from first contact with a potential customer to a signed sales contract that meets our backlog criteria (as discussed below) varies significantly and generally spans between six months and 30 months. The length of time between receipt of a signed contract and revenue recognition is generally governed by the time required by the customer to build, renovate or prepare the treatment room for installation of the platform. We report our customer revenues in four geographic regions: the Americas, EIMEA, Asia Pacific and Japan. The Americas region includes the United States, Canada and Latin America. The EIMEA region includes Europe, India, the Middle East and Africa. The Asia Pacific region consists of Asia, Australia and New Zealand.

In the United States, we primarily market directly to customers, including hospitals and stand-alone treatment facilities, through our sales organization we also market to customers through sales agents and group purchasing organizations. Outside the United States, we market to customers directly and through use of distributors and sales agents. In addition to our offices in the United States, we have international offices in Morges, Switzerland; Hong Kong, China; Shanghai, China and Tokyo, Japan and direct sales staff in most countries in Western Europe, Japan, India and Canada. In addition, we have distributors in Eastern Europe, Russia, the Middle East, the Asia Pacific region, and Latin America.

Our systems have been named in 100 out of 118 Class A user licenses awarded in the 13th five year plan by the China National Health Commission to purchase radiation therapy devices. The Chinese Ministry of Health requires a tender process following the license awards for all participating end user hospitals prior to being able to take receipt of a Class A device. This tender process defines the transactional terms and conditions related to each hospital’s equipment order and does not put us in a competitive bidding situation that would result in changes in the specific device for which the hospital has received the Class A user license. During the year ended June 30, 2023, we delivered Class A devices to China and recognized system revenue related to such devices of approximately $32.6 million in the same period. Despite the challenges and uncertainties in China and around the world, including those created by the COVID-19 pandemic, we continue to believe that China remains the world’s fastest growing market for radiation oncology systems and the pandemic does not affect the long-term demand for radiotherapy equipment in China.

Joint Venture

In January 2019, our wholly-owned subsidiary, Accuray Asia Limited (“Accuray Asia”), entered into an agreement with CNNC High Energy Equipment (Tianjin) Co., Ltd. (the “CIRC Subsidiary”), a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture, CNNC Accuray (Tianjin) Medical Technology Co. Ltd. (the “JV”), to manufacture and sell radiation oncology systems in China. The JV aims to be uniquely positioned to serve China, which we believe is the world’s largest growth market for radiation oncology systems. China represents a significantly underserved market for linacs based on the country’s population and cancer incidence rates on both an absolute and relative country basis. Accuray Asia has a 49% ownership interest in the JV and the CIRC Subsidiary has a 51% ownership interest in the JV.

With the receipt of the necessary permits and licenses to operate, the JV has begun selling products in China, much like a distributor. In the long term, we anticipate that the JV will manufacture and sell a locally branded “Made in China”

66

Table of Contents

radiotherapy device in the Class B license category, or Class B device, which would replace our current offering in that category. We believe this strategy will allow us to best maximize both near and longer-term opportunities in China. The regulatory submission to the National Medical Products Administration (“NMPA”) has been completed and we expect to receive NMPA clearance in the first half of calendar year 2024 and take orders shortly thereafter. For more information on the JV, see Note 11, “Joint Venture,” of the Notes to the Consolidated Financial Statements.

Restructuring

In the second quarter of fiscal year 2023, we announced a cost savings initiative designed to reduce operating costs. This cost savings initiative resulted in the reduction of our global workforce by 4.5%. We recorded $2.7 million in restructuring charges during the fiscal year 2023. These charges are cash-based charges, primarily related to severance expenses and other one-time termination benefits. At June 30, 2023, we do not have any remaining accruals related to the restructuring charges.

Backlog

In order for the product portion of a system sales agreement to be included in backlog, it must meet the following criteria:

•
The contract is properly executed by both the customer and us. A customer purchase order that incorporates the terms of our contract quote will be considered equivalent to a signed and executed contract. The contract has either cleared all its contingencies or contained no contingencies when signed;

•
We have received a minimum deposit or a letter of credit; or the sale is to a customer where a deposit is deemed not necessary or customary (i.e., sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, customers with trade-in of existing equipment, sales via tender awards, or indirect channel sales that have signed contracts with end-customers);

•
The specific end-customer site has been identified by the customer in the written contract or written amendment; and

•
Less than 30 months have passed since the contract met all the criteria above.

Our backlog includes contractual agreements with our customers for the purchase of our CyberKnife or TomoTherapy platforms, including the Radixact Systems and related upgrades. The amount of backlog recognized into revenue is primarily impacted by three items: cancellations, age-outs and age-ins, and foreign currency fluctuations. We cannot provide assurance that we will convert backlog into recognized revenue, primarily due to factors outside of our control, such as:

•
Orders could be cancelled for reasons such as, changes in customers’ priorities or financial condition, changes in government or health insurance reimbursement policies, or changes to regulatory requirements. Cancellations are outside of our control and are difficult to forecast; however, we continue to work closely with our customers to minimize the impact of cancellations on our business;

•
Orders are considered aged-out and removed from reported backlog if we have not been able to recognize revenue on an agreement after 30 months. Agreements may age-out for many reasons, including but not limited to, the inability of the customer to pay, the inability of the customer to adapt their facilities to accommodate our products in a timely manner, or the inability to timely obtain licenses necessary for customer facilities or operation of our equipment. Age-ins represent orders that previously aged-out but have been recognized as revenue in the current period; and

•
Orders include amounts not denominated in U.S. Dollars and therefore, fluctuations in the U.S. Dollar as compared to other currencies will impact revenue. Generally, strengthening of the U.S. Dollar will negatively impact revenue. Backlog is stated at historical foreign currency exchange rates, and revenue is released from backlog at current exchange rates, with any difference recorded as a backlog adjustment.

67

Table of Contents

A summary of gross orders, net orders, and order backlog is as follows (in thousands):

As of June 30, 2023, the portion of our order backlog that represented upgrades sold through service contracts, totaled $0.6 million, as compared to $0.2 million as of June 30, 2022.

Gross Orders and Book to Bill Ratio

Gross orders are defined as the sum of new orders recorded during the period, adjusted for any revisions to existing orders during the period.

Gross orders decreased by $21.2 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to decreases in EIMEA, partially offset by an increase in Asia Pacific and China. CyberKnife platform gross orders decreased by $45.5 million and TomoTherapy platform gross orders increased by $24.3 million. Gross orders were unfavorably impacted by $12.0 million due to foreign exchange rate fluctuations during the year ended June 30, 2023, as compared to the year ended June 30, 2022.

Our book to bill ratio is defined as gross orders for the period divided by product revenue for the period. Our book to bill ratio for the year ended June 30, 2023, was 1.3 as compared to 1.5 for the year ended June 30, 2022. A book-to-bill ratio greater than 1.2 indicates strong demand for our products. This metric allows management to monitor our business development efforts to ensure we grow our backlog and our business over time.

Net Orders

Net orders are defined as gross orders, less cancellations, age-outs net of age-ins, foreign exchange and other adjustments during the period.

Net orders increased by $15.6 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, resulting from a reduction in the age-out of orders, a reduction in the cancellation of orders and an increase in the age-ins of orders, partially offset by a decrease in gross orders and unfavorable foreign exchange rate fluctuations.

In recent years, the percentage of gross orders received from our distribution partners in the international markets represented 76%, 71%, and 82% of gross orders for fiscal year ended June 30, 2023, 2022 and 2021, respectively. We anticipate that distributor orders from international markets will continue to represent a significant portion of our gross orders in the foreseeable future. International orders are affected by foreign currency fluctuation as well as government programs that stimulate the purchase of healthcare products, both of which could affect the demand for our products and timing of orders from period to period. In addition, our order-to-revenue conversion cycle for international distributor orders has been generally longer, compared to that of direct channel sales and could cause fluctuations in our age-outs from period to period.

68

Table of Contents

Results of Operations

Fiscal 2023 results compared to fiscal 2022

Net revenue

Net revenue by sales classification is as follows:

a)
Includes sales of products to the JV, an equity method investment, of $55,658 during the year ended June 30, 2023, $45,545 during the year ended June 30, 2022, and $12,033 during the year ended June 30, 2021, respectively. See Note 11.

b)
Includes sales of services to the JV, an equity method investment, of $10,919 during the year ended June 30, 2023, $10,332 during the year ended June 30, 2022, and $12,360 during the year ended June 30, 2021, respectively. See Note 11.

Products net revenue increased by $18.5 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to an increase in Tomo Therapy platform sales, partially offset by a decrease in CyberKnife platform sales. Product revenues were unfavorably impacted by $7.0 million due to foreign exchange rate fluctuations during the year ended June 30, 2023, as compared to the year ended June 30, 2022.

Services net revenue decreased by $0.8 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to a $4.9 million decrease in revenue from contract services that was largely driven by unfavorable foreign exchange rate fluctuations, partially offset by $4.1 million increase in revenue from training, spare parts, upgrades and installation activity. Service revenues were unfavorably impacted by $10.8 million due to foreign exchange rate fluctuations during the year ended June 30, 2023, as compared to the year ended June 30, 2022.

Net revenue by geographic region, which is based on the shipping location of our customer, is as follows:

Revenue derived from sales outside of the Americas region was $325.3 million during the year ended June 30, 2023, as compared to $303.9 million during the year ended June 30, 2022. Revenue derived from sales outside the Americas region increased primarily due to an increase from system sales in EIMEA and Japan, and an increase from services in EIMEA, Asia Pacific, and China, mostly offset by a decrease from sales of systems in China, which was largely due to COVID-19-related restrictions that occurred during the first quarter of fiscal year 2023. Revenues from the Americas region decreased by $3.7 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to a decrease from service revenue, partially offset by an increase from sales of systems.

Gross profit

Gross profit by sales classification is as follows:

69

Table of Contents

The overall gross profit decreased by $6.0 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, due to a decrease in products gross profit, which was largely driven by unfavorable foreign exchange rate fluctuations, inflation, and an unfavorable product mix in the sales of our systems, partially offset by an increase in service gross profit driven by lower headcount and improved parts efficiency.

Operating Expenses

Research and development expenses decreased by $0.6 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to a reduction in outside services and consulting, partially offset by an increase in employee compensation and benefits, which includes severance payments in the second quarter of fiscal year 2023, and lower research and development credits from our equity method investment.

Selling and marketing expenses decreased by $3.5 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to lower employee compensation and benefits due to lower headcount as a result of our cost savings initiatives during the first half of fiscal year 2023, and a decrease in outside services.

General and administrative expenses increased by $3.9 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to higher external consulting fees related to the implementation of a new enterprise resource planning system, a $2.0 million bad debt reserve in the fourth quarter of fiscal year 2023 related to the unplanned U.S. bankruptcy of one customer, and employee compensation and benefits, as a result of an increase in headcount.

Income on equity method investment

Income on equity method investment increased by $2.3 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, due to an increase in the sales of systems by our JV.

70

Table of Contents

Other expense, net

Other expense, net, increased by $1.4 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to an increase in interest expense as a result of higher interest rates on our Credit Facility, partially offset by a decrease in foreign currency transaction losses.

Provision for income taxes

Provision for income taxes decreased by $0.9 million during the year ended June 30, 2023, as compared to the year ended June 30, 2022, primarily due to lower deferred tax liability on Switzerland withholding taxes as compared to the prior year.

Liquidity and Capital Resources

At June 30, 2023, we had $89.4 million in cash and cash equivalents. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the ongoing recovery from the COVID-19 pandemic, inflation, actions taken to counter inflation, foreign currency exchange rate fluctuations and instability in the banking sector and the risks included in Part I, Item 1A titled “Risk Factors.” Based on our cash and cash equivalents balance, available debt facilities, current business plan and revenue prospects, we believe we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months. We continue however, to critically review our liquidity and anticipated capital requirements in light of the significant uncertainty created by macroeconomic conditions and ongoing recovery from the COVID-19 pandemic.

Our liquidity and cash flows have been and could continue to be materially impacted by current macroeconomic factors, including facility closures, supply chain disruptions, rising inflation, increased volatility in the financial markets, instability in the banking sector, tightening of credit markets which could impact debt availability, and the COVID-19 pandemic. These factors have and could continue to negatively impact our business operations and cash flows for the foreseeable future, including reductions in revenue, decreases in gross margin and delays in payments from customers, as well as declines or delays in the conversion of backlog to revenue. For example, certain of our revenue may not be collectible to the extent our customers suffer financial difficulty and, in fiscal 2023, we increased our bad debt reserve to account for potentially uncollectible revenue. Accordingly, there remain uncertainties as to how the COVID-19 pandemic and the current macroeconomic environment will impact our business, results of operations, access to sources of liquidity and financial condition in the future. As a result, we are unable to predict with certainty the impacts of these factors on our ability to maintain compliance with the financial covenants contained in the credit and security agreements related to our credit facilities.

In May 2021, we issued $100.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2026 under an indenture between us and The Bank of New York Mellon Trust Company, N.A., as trustee. Concurrently, with the issuance of the notes, in May 2021, we entered into a senior secured credit agreement with Silicon Valley Bank, individually as a lender and agent, and the other lenders (the “Existing Credit Agreement”), which provides for a five-year $80 million term loan facility (the "Term Loan Facility") and a $40 million revolving credit facility (the “Revolving Credit Facility”). In October 2022, we entered into an amendment with respect of our Existing Credit Agreement to change the requirements of the financial maintenance covenants under the Existing Credit Agreement for the fiscal quarter ending December 31, 2022

71

Table of Contents

through the end of the fiscal quarter ending June 30, 2023. As of June 30, 2023, we had an outstanding balance under the Term Loan Facility of $69.1 million and Revolving Credit Facility of $10.0 million. The weighted average effective interest rate on the outstanding balances under the Term Loan Facility was 7.26% and Revolving Credit Facility was 8.27% during the twelve months ended June 30, 2023. See Note 9, "Debt" to the Notes to the consolidated financial statements for further information regarding the Existing Credit Agreement and 3.75% Convertible Senior Notes due 2026. Also see Note 8, "Commitments and Contingencies" to the Notes to the consolidated financial statements for further information regarding our cash commitments related to our debt.

We may also experience other, unexpected impacts to our business, including matters discussed in the Part I, Item 1A titled “Risk Factors.” While we were in compliance with such covenants for the period ended June 30, 2023, failure to meet the covenant requirements in the future could cause us to be in default and the maturity of the related debt could be accelerated and become immediately payable. Following June 30, 2023, our financial maintenance covenants under the Existing Credit Agreement will become more stringent and, as a result could be more difficult to comply with. These restrictions could adversely affect our ability to finance our future operations or capital needs, withstand a future downturn in our business or the economy in general, engage in business activities, including future opportunities that may be in our interest, and plan for or react to market conditions or otherwise execute our business strategies. Our ability to comply with the covenants and other terms governing the Credit Facilities will depend in part on our future operating performance. If we fail to comply with such covenants and terms, we may be in default and the maturity of the related debt could be accelerated and become immediately due and payable. In addition, because substantially all of our assets are pledged as a security under the Credit Facilities, if we are not able to cure any default or repay outstanding borrowings, such assets are subject to the risk of foreclosure by our lenders. This may require us to obtain waivers or amendments to the credit and security agreement in order to maintain compliance and there can be no certainty that any such waiver or amendments will be available, or what the cost of such waiver or amendment, if obtained, would be. If we are unable to obtain necessary waivers or amendment and the debt under such credit facility is accelerated, we would be required to obtain replacement financing at prevailing market rates, which may not be favorable to us. There is no guarantee that we would be able to satisfy our obligations if any of our indebtedness is accelerated.

Additionally, the undistributed earnings of our foreign subsidiaries at June 30, 2023, for all countries except Japan, France, and Switzerland are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise. Future repatriation of our foreign earnings could be subject to income taxes. As of June 30, 2023, we had $8.5 million of cash and cash equivalents at our foreign subsidiaries. If such funds were repatriated, there will be additional foreign tax withholdings imposed, depending on the country from which the funds were repatriated.

Cash Flows

Cash Flows From Operating Activities

Net cash provided by operating activities was $15.5 million during the year ended 2023, resulting primarily from a $20.2 million increase in non-cash items and a $4.6 million increase from the net changes in assets and liabilities, offset by a net loss of $9.3 million.

•
Non-cash items primarily consisted of consisted of share-based compensation expense of $10.1 million, depreciation and amortization expense of $4.5 million, provision for inventories write-down of $4.4 million, and $2.3 million for provision for credit losses, partially offset by income from our equity method investment of $2.6 million.

72

Table of Contents

•
The major contributors to the increase in net changes of assets and liabilities during the year ended 2023 were as follows: an $18.5 million decrease in accounts receivable primarily due to an increase in collections; and a $2.9 million increase in accounts payable primarily due to the timing of payments; partially offset by a $6.9 million increase in inventories primarily due to increased costs for parts; a $4.7 million decrease in customer advances due to delivery of orders, and a $2.6 million decrease in deferred revenue primarily due to the timing of revenue recognition.

Cash Flows From Investing Activities

Net cash used in investing activities was $12.7 million during the year ended 2023, primarily due to the purchase of property and equipment, which included $5.7 million for the implementation of a new enterprise resource planning system in which the costs were capitalized.

Cash Flows From Financing Activities

Net cash used in financing activities during the year ended 2023 was due to the scheduled payment of $6.0 million of the principal amount outstanding on our Term Loan Facility and a $2.9 million repayment of our 3.75% Convertible Senior Notes due 2022, primarily offset by a $5.0 million drawdown on our Revolving Credit Facility and $2.2 million in proceeds from the issuance of common stock to employees from employee stock plans.

Operating Capital and Capital Expenditure Requirements

Our future capital requirements depend on numerous factors. These factors include but are not limited to the following:

•
Revenue generated by sales of our products and service plans;

•
Our ability to generate cash flows from operations;

•
Costs associated with our sales and marketing initiatives and manufacturing activities;

•
Facilities, equipment and IT systems required to support current and future operations;

•
Rate of progress and cost of our research and development activities;

•
Costs of obtaining and maintaining FDA and other regulatory clearances of our products;

•
Effects of competing technological and market developments;

•
Number and timing of acquisitions and other strategic transactions;

•
Servicing and maturity of our current future indebtedness, including interest rates;

•
The impact of inflation on our expenses; and

•
The unpredictable impact of the macroeconomic environment and the COVID-19 pandemic, including on collections, supply chain, and logistics.

We believe that our current cash and cash equivalents balance will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If these sources of cash and cash equivalents are insufficient to satisfy our liquidity requirements, or we believe market conditions are favorable, we may seek to sell additional equity or debt securities or enter into additional credit facilities. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Operating and Capital Expenditure Requirements and Contractual Obligations

Our purchase commitments and obligations include all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which we have not received the

73

Table of Contents

goods or services and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our long-term material cash requirements include lease obligations. See Note 5, “Leases” to the Notes to the consolidated financial statements for further information.

Inflation

We are experiencing rising costs for certain materials, including increased logistics costs, that have adversely affected our gross margins, which have had a material effect on our business, financial condition and results of operations for fiscal year 2023. Continued pressure from inflationary factors, such as further increases in the cost of materials for our products, interest rates, overhead costs and logistics costs could further exacerbate these effects and harm our business, operating results, and financial condition.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. The economic uncertainty in the current environment caused by the COVID-19 pandemic however, could limit our ability to accurately make and evaluate our estimates and judgments. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.

All of our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 1, The Company and its Significant Accounting Policies, to the consolidated financial statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Management believes the critical accounting policies and estimates are those related to revenue recognition and the assessment of stand-alone selling price ("SSP"), allowance for credit losses, valuation of inventories, and the valuation of equity method investments.

Revenue Recognition and the Assessment of Stand-Alone Selling Price

Our revenue is primarily derived from new system and upgrade sales of CyberKnife and TomoTherapy platforms and services, which include post-contract customer support (“PCS”) contracts (warranty period services and post-warranty services), installation services, training and other professional services. We record our revenue net of any value-added or sales tax. We recognize revenue for certain performance obligations at the point in time when control is transferred, such as delivery of products. We recognize 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. Payments received in advance of system shipment are recorded as customer advances and are deferred until product shipment when they are recognized in revenue. We assess the probability of collection based on a number of factors, including past transaction history with the customer and creditworthiness of the customer. We generally do not request collateral from our customers but will request advance payments or letter’s of credit when deemed necessary.

We frequently enter into sales arrangements that contain multiple performance obligations. For sale arrangements that contain multiple performance obligations, we account 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. The SSP is determined based on observable prices at which we separately sell the products and services. If the SSP is not directly observable, then we will estimate the SSP considering market conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

74

Table of Contents

Allowance for Credit Losses

We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for credit losses. If our evaluation of our customers’ financial conditions does not reflect our future ability to collect outstanding receivables, additional provisions may be needed and our operating results could be negatively affected.

Valuation of Inventories

The valuation of inventory requires us to estimate obsolete or excess inventory as well as damaged inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. We regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand to support future sales and service. If our demand forecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could be required to write off inventory beyond the current reserve, which would negatively impact our gross margin.

Valuation of Equity Method Investments

We have an equity method investment in CNNC Accuray (Tianjin) Medical Technologies Co. Ltd., our joint venture in China. Our equity method investment is held at cost and adjusted for impairment when it would be deemed to be impaired. We monitor this investment for events or circumstances indicative of a potential impairment, and we make appropriate reductions in carrying value if we determine that an impairment charge is required, based primarily on the financial condition or near term prospects of the investee.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward‑looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form 10‑K, particularly in “Risk Factors.” See “Special Note Regarding Forward‑Looking Statements.”

Overview

Company

Accuray Incorporated is a radiation therapy company that develops, manufactures, sells and supports market-changing solutions that are designed to deliver radiation treatments for even the most complex cases, while making commonly treatable cases even more straightforward, to meet the full spectrum of patient needs. We believe in comparison to conventional linear accelerators, our treatment delivery, planning, and data management solutions provide better accuracy, flexibility, and control; fewer treatments with shorter treatment times; and the technology to expand beyond cancer, making it easier for clinical teams around the world to provide treatments that help patients get back to living their lives, faster.

Our innovative technologies, the CyberKnife® and TomoTherapy® platforms, including the Radixact® System, our next generation TomoTherapy platform, are designed to deliver advanced treatments, including stereotactic radiosurgery (SRS), stereotactic body radiation therapy (SBRT), intensity modulated radiation therapy (IMRT), image-guided radiation therapy (IGRT), and adaptive radiation therapy (ART). The CyberKnife and TomoTherapy platforms have complementary clinical applications with the same goal: to empower our customers to deliver the most precise and accurate treatments while still minimizing dose to healthy tissue, helping to reduce the risk of side effects that may impact patients’ quality of life. Each of these systems serves patient populations treated by the same medical specialty, radiation oncology, with advanced capabilities. The CyberKnife platform is also used by neurosurgeons specializing in radiosurgery to treat patients with tumors in the brain and spine, and neurologic disorders. In addition to these products, we also provide services, which include post-contract customer support (warranty period services and post warranty services), installation services, training, and other professional services.

The CyberKnife Platform

The CyberKnife platform is the only robotic, full-body stereotactic radiosurgery (SRS) and stereotactic body radiation therapy (SBRT) delivery device on the market. The latest generation is the CyberKnife S7 System, which combines speed, advanced precision, and real-time artificial intelligence (AI)-driven motion tracking and synchronized treatment delivery for all SRS and SBRT treatments, in as little as 15 minutes. The platform is designed to treat cancerous and benign tumors throughout the body, as well as neurologic disorders. The use of SRS and SBRT with the CyberKnife platform to treat tumors throughout the body has grown significantly in recent years. SRS and SBRT are performed on an outpatient basis in a limited number of treatment sessions - typically 1-5 fractions. They enable the treatment of patients who might not otherwise be treated with radiation, who may not be good candidates for surgery, or who desire a non-surgical treatment option.

The CyberKnife S7 System includes disease-specific tracking and treatment delivery solutions for brain, spine, lung and prostate tumors, improvements in treatment speed as compared to earlier systems, more options to configure the treatment room, and expanded number of nodes leading to more coverage and minimizing dose to healthy tissue. The system has the option of fixed collimators plus the Iris Variable Aperture Collimator and/or InCise Multileaf Collimator (MLC). With the addition of the InCise MLC, the CyberKnife S7 System enables treatment of larger tumors previously thought untreatable with radiosurgery and SBRT. The InCise MLC and IMRT planning tools enable expansion of indications that can be treated with a CyberKnife platform to include many IMRT indications.

73

Table of Contents

Using our Synchrony® real-time target tracking with dynamic delivery technology and computer controlled robotic mobility, the CyberKnife platform is designed to deliver radiation from a wide array of beam angles and autonomously track, detect and correct for even the slightest tumor and patient movement in real time throughout the entire treatment. This design is intended to enable the CyberKnife platform to deliver high dose radiation with precision and accuracy, which minimizes damage to surrounding healthy tissue and eliminates the need for invasive head or body immobilization frames.

The Accuray Precision® Treatment Planning System (TPS) with the VOLO Optimizer software on the CyberKnife S7 System enables customers to significantly improve operational efficiency by reducing both the time to create high quality treatment plans and the time it takes to deliver patient treatments. The next-generation TPS with the optimizer facilitates the development of clinically optimal treatment plans up to 90 percent faster than before and the delivery of the treatment up to an estimated 50 percent faster than before the availability of this software.

We believe the CyberKnife platform offers clinicians and patients significant benefits over other vendors’ radiation therapy systems in the market.

The long-term success of the CyberKnife platform is dependent on a number of factors including the following:

•
Continued adoption of our CyberKnife platform, including the CyberKnife M6 System and CyberKnife S7 System, in markets where they are available;

•
Greater awareness among doctors and patients of the benefits of radiosurgery delivered with the CyberKnife platform, including its robotic architecture and Synchrony technology and VOLO optimizer;

•
Continued evolution in clinical studies demonstrating the safety, efficacy and other benefits of using the CyberKnife platform to treat tumors in various parts of the body;

•
Change in medical practice leading to utilization of stereotactic body radiation therapy more regularly as an alternative to surgery or other treatments;

•
Continued advances in our technology that improve the quality of treatments and ease of use of the CyberKnife platform;

•
Receipt of regulatory approvals in various countries which are expected to improve access to radiosurgery with the CyberKnife S7 System in such countries;

•
Medical insurance reimbursement policies that cover CyberKnife platform treatments; and

•
Our ability to expand sales of CyberKnife M6 and S7 Systems in countries throughout the world where we do not currently sell or have not historically sold a significant number of any CyberKnife platform configurations.

The Radixact System, the Next-Generation TomoTherapy Platform

The Radixact System, the next generation TomoTherapy platform, allows for fully integrated radiation treatment planning, delivery and data management, enabling clinicians to deliver ultra-precise treatments to more than 50 patients per day. The platform’s ring gantry architecture enables precise and efficient treatments with a high degree of dose conformity, while the high-speed binary MLC effectively modulates and shapes the radiation beam as it is emitted. The combination of the ring gantry and the MLC enable treatment to be delivered continuously in a 360 degree helical pattern around the patient’s body (TomoHelical). Additionally, the TomoDirect feature provides the TomoTherapy platform with added versatility, enabling the delivery of high quality, fixed angle beams. The two treatment delivery modes - TomoHelical and TomoDirect - provide flexibility in the types of indications that can be treated with radiation, from the simplest to the most complex cases, multiple tumors and recurrent tumors.

74

Table of Contents

Our Synchrony real-time target tracking with dynamic delivery for the Radixact System adds intrafraction motion synchronization capabilities to this device, enabling real-time tracking, visualization and correction for tumor motion during treatment, with the goal of improving dose accuracy and treatment times as compared to conventional radiation therapy systems. Synchrony can be used on the Radixact System to adapt treatment delivery for tumors that move as a result of bodily processes, including respiration and digestion, as well as patient movement. Treatments are truly personalized, as delivery is adapted to the individual’s unique movements throughout treatment delivery. If movement changes during treatment, delivery is adapted for that unique change.

The Radixact System seamlessly integrates with ClearRT helical kVCT high-fidelity imaging, providing clinicians with an option to produce exceptional diagnostic-like quality CT images, quickly and cost-effectively, to improve patient care. ClearRT imaging provides the largest imaging field of view available on a radiation delivery system at 50 cm (diameter) by 135 cm (long), and speed, as evidenced by its ability to capture a 1-meter image in only 1 minute. ClearRT delivers enhanced imaging capabilities compared to conventional linear accelerator systems that rely on cone-beam CT (CBCT) imaging and as an alternative to MR-based radiation therapy systems that can be complex and cost prohibitive to use.

The TomoTherapy platform integrates into a single system all of the key elements for radiation therapy, including treatment planning, CT image guided patient positioning, treatment delivery, quality assurance and adaptive planning. The imaging and treatment planning capabilities of many traditional systems are more modular or require cumbersome add ons or separate treatment planning systems that result in clinicians taking more steps between scanning, planning and treatment of patients. Conversely, the integrated imaging and treatment features of the Radixact System allows clinicians to scan, plan and treat cancer patients efficiently. Treatment plans as well as daily images can be easily accessed remotely, enabling clinical teams to collaboratively work together, regardless of location, ensuring higher quality plan development and delivery.

We believe the TomoTherapy platform offers clinicians and patients significant benefits over other vendors’ radiation therapy systems in the market. The long-term success of the TomoTherapy platform is dependent on a number of factors including the following:

•
Continued adoption of our TomoTherapy platform, including the Radixact System, in markets where it is available;

•
Greater awareness among doctors and patients of the unique benefits of radiation therapy using the TomoTherapy platform, including its ring gantry architecture that enables treatment delivery from multiple 360 degree rotations around the patient, and ClearRT helical kVCT imaging for the Radixact System, designed to produce exceptional diagnostic-like quality CT images, quickly and cost-effectively;

•
Advances in our technology that improve the quality of treatments and ease of use of TomoTherapy platform;

•
Greater awareness among doctors of the now-established reliability of TomoTherapy platform; and

•
Our ability to expand sales of TomoTherapy platform in countries throughout the world where we do not currently sell or have not historically sold a significant number of any TomoTherapy platform configurations.

Sale of Our Products

Generating revenue from the sale of our platforms is a lengthy process. Selling our platforms, from first contact with a potential customer to a signed sales contract that meets our backlog criteria (as discussed below) varies significantly and generally spans between six months and two years. The length of time between receipt of a signed contract and revenue recognition is generally governed by the time required by the customer to build, renovate or prepare the treatment room for installation of the platform.

75

Table of Contents

In the United States, we primarily market directly to customers, including hospitals and stand-alone treatment facilities, through our sales organization we also market to customers through sales agents and group purchasing organizations. Outside the United States, we market to customers directly and through use of distributors and sales agents. In addition to our offices in the United States, we have sales and service offices in Europe, India, Asia, and South America.

As of June 30, 2022, our systems were named in 100 out of 118 Class A user licenses awarded in the 13th five year plan by the China National Health Commission to purchase radiation therapy devices. The Chinese Ministry of Health requires a tender process following the license awards for all participating end user hospitals prior to being able to take receipt of a Class A device. This tender process defines the transactional terms and conditions related to each hospital’s equipment order and does not put us in a competitive bidding situation that would result in changes in the specific device for which the hospital has received the Class A user license. During the year ended June 30, 2022, we delivered Class A devices to China and recognized system revenue related to such devices of approximately $65.1 million in the same period. We currently anticipate system revenue related to the remaining Class A user licenses awarded to date in the next 12 to 18 months. Despite the challenges and uncertainties in China and around the world, including those created by the COVID-19 pandemic, we continue to believe that China remains the world’s fastest growing market for radiation oncology systems and the pandemic does not affect the long-term demand for radiotherapy equipment in China.

Joint Venture

In January 2019, our wholly-owned subsidiary, Accuray Asia Limited (“Accuray Asia”), entered into an agreement with CNNC High Energy Equipment (Tianjin) Co., Ltd. (the “CIRC Subsidiary”), a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture, CNNC Accuray (Tianjin) Medical Technology Co. Ltd. (the “JV”), to manufacture and sell radiation oncology systems in China. The JV aims to be uniquely positioned to serve China, which we believe is the world’s largest growth market for radiation oncology systems. China represents a significantly underserved market for linacs based on the country’s population and cancer incidence rates on both an absolute and relative country basis. Accuray Asia has a 49% ownership interest in the JV and the CIRC Subsidiary has a 51% ownership interest in the JV.

In July 2019, the JV broke ground on its facility based in Tianjin, China, which serves as its headquarters and home of its manufacturing, sales organization and service operations. The JV has received its Radiation Safety License from the China Ministry of Environmental Protection, along with its license to do business in China and Medical Device Operating Permit, enabling the JV to sell, install and provide further service to our radiation therapy devices in China. The JV has also completed construction of its manufacturing facility and has obtained the Quality Management System certification with ISO13485 standard.

With the receipt of the necessary permits and licenses to operate, the JV has begun selling products in China, much like a distributor. In the long term, we anticipate that the JV will manufacture and sell a locally branded “Made in China” radiotherapy device in the Class B license category, or Class B device, which would replace our current offering in that category. We believe this strategy will allow us to best maximize both near and longer-term opportunities in China. Required testing for the Class B device is ongoing and the National Medical Products Administration ("NMPA") submission is expected to finish in the fourth calendar quarter of 2022 as the due date has been extended as a result of the COVID-19 travel restrictions.

We apply the equity method of accounting to our ownership interest in the JV as we have the ability to exercise significant influence over the JV but lack controlling financial interest and are not the primary beneficiary. We recognize revenue on sales to the JV in the current period, eliminating 49% of profit to the extent goods sold have not been sold through by the JV to an end customer at the end of such reporting period. We deferred $5.4 million and $2.1 million of intra-entity profit margin as of June 30, 2022 and June 30, 2021, respectively. During the year ended June 30, 2022, we recognized $1.4 million of previously deferred intra-entity profit margin from sales and recorded intra-entity profit margin deferral of $4.7 million from sales executed during the period. Our consolidated accumulated deficit includes $1.0 million of accumulated gains related to our equity method investment.

76

Table of Contents

As of June 30, 2022, we had carrying value of $12.9 million in the JV and owned a 49% interest in the entity. Our proportional share of the underlying equity in net assets of the JV was approximately $14.6 million. The difference between the carrying value of the equity investment and our proportional share of the underlying equity in net assets of the JV of $1.7 million, adding back $5.4 million of eliminated intra-entity profit, constitutes equity method goodwill of $4.7 million at June 30, 2022 that is subject to impairment analysis. No impairment was identified as of June 30, 2022.

COVID-19 and Economic Conditions

In fiscal year 2020, an outbreak of a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019 (“COVID-19”) was surfaced in Wuhan, China and was subsequently recognized as a pandemic by the World Health Organization. The COVID-19 pandemic severely restricted the level of economic activity around the world and while conditions have improved, the pace and degree of recovery varies significantly. In response to this pandemic, governments and private industry have taken preventative or protective actions at varying levels, such as imposing restrictions on travel and business operations, which has resulted in the temporary or permanent closure of certain businesses, as well as advising or requiring individuals to limit or forego their time outside of their homes, particularly in group settings. The COVID-19 pandemic has adversely impacted our business operations as well as those of our customers and partners. In addition, across the healthcare industry, resources are being prioritized for the treatment and management of the pandemic and away from non-urgent or elective procedures. Some of our customers, which include hospitals, major academic medical centers, and other related entities, have incurred losses during the COVID-19 pandemic due to significantly reduced patient volume. The public health actions being undertaken to reduce the spread of the virus have created and may continue to create significant disruptions with respect to demand for our products and services; the operating procedures and workflow of our customers, particularly hospitals; our ability to continue to manufacture our products; and the reliability of our supply chain.

Our financial results have also been affected by the COVID-19 pandemic in various ways. The COVID-19 pandemic has continued to adversely impact the pace at which our backlog converts to revenue in the near-term. This is primarily the result of pandemic-related delays in the timing of deliveries and installations which has adversely affected our revenue. We have experienced such delays in deliveries and installations since the third quarter of fiscal year 2020 and expect that such delays will continue to some degree , which could have a negative impact on our revenue. We have also experienced disruptions in sales and delays in customer payments as a result of changes to and redirection of customer resources to the response to the COVID-19 pandemic and closures of customer facilities. We have also received requests from a few customers to extend payment terms or temporarily suspend service and corresponding payment obligations and while we have only received a small number of requests thus far, there can be no guarantee that more customers will not ask for the same. In addition, the global supply chain is continuing to be affected by the COVID-19 pandemic as well as other geopolitical uncertainty as disruptions in parts of our supply chain have resulted in delays in the receipt of certain components for our products as well as increased pricing pressure for such parts. These ongoing supply chain challenges and heightened logistics costs have affected our gross margins and net income (loss), and our current expectations are that gross margins and net income (loss) will continue to be adversely affected by increased material costs and freight and logistic expenses at least through the remainder of the calendar year of 2022, if not longer. Furthermore, certain parts required for the manufacture and servicing of our products, such as electronic components, are scarce and becoming increasingly difficult to source even at increased prices. If such parts become unavailable to us, we would not be able to manufacture or service our products, which would adversely impact revenue, gross margins, and net income (loss). As a result, we are carefully monitoring the pandemic and related economic impact on our financial condition and results of operations. We intend to continue to execute on our strategic plans and operational initiatives. However, given the uncertainty regarding the spread, severity and potential resurgence of COVID-19, the impact of new COVID-19 variants, vaccination deployment efforts, how long the pandemic and associated health measures will last, as well as the related economic impacts, including supply chain issues and inflation, and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K, the related financial impact cannot be reasonably estimated with any certainty at this time, although the impacts are expected to continue and may significantly affect our business. We expect that the impacts on our customers’ business and our business will continue through this period of economic uncertainty as supply chain issues, inflation and other factors continue to worsen or emerge. Accordingly, management is carefully evaluating our liquidity position, communicating with and monitoring the

77

Table of Contents

actions of our customers and suppliers, and reviewing our near-term financial performance as the uncertainty related to these factors continues to unfold.

Backlog

As of June 30, 2022, backlog totaled $563.7 million, of which $0.2 million represented upgrades sold through service contracts. As of June 30, 2021, backlog totaled $616.4 million.

In order for the product portion of a system sales agreement to be counted as backlog, it must meet the following criteria:

•
The contract is properly executed by both the customer and us. A customer purchase order that incorporates the terms of our contract quote will be considered equivalent to a signed and executed contract. The contract has either cleared all its contingencies or contained no contingencies when signed;

•
We have received a minimum deposit or a letter of credit; or the sale is to a customer where a deposit is deemed not necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, customers with trade-in of existing equipment, sales via tender awards, or indirect channel sales that have signed contracts with end-customers);

•
The specific end customer site has been identified by the customer in the written contract or written amendment; and

•
Less than 2.5 years have passed since the contract met all the criteria above.

Although our backlog includes only contractual agreements with our customers for the purchase of our CyberKnife or TomoTherapy platforms, including the Radixact Systems and related upgrades, we cannot provide assurance that we will convert backlog into recognized revenue due primarily to factors outside of our control. The amount of backlog recognized into revenue is primarily impacted by three items: cancellations, age-outs and foreign currency fluctuations. Orders could be cancelled for reasons including, without limitation, changes in customers’ needs, priorities or financial condition, changes in government or health insurance reimbursement policies, or changes to regulatory requirements. In addition to cancellations, after 2.5 years, if we have not been able to recognize revenue on a contract, we remove the revenue associated with the contract from backlog and the order is considered aged out. Contracts may age-out for many reasons, including but not limited to, inability of the customer to pay, inability of the customer to adapt their facilities to accommodate our products in a timely manner, or inability to timely obtain licenses necessary for customer facilities or operation of our equipment. Our backlog also includes amounts not denominated in U.S. Dollars and therefore fluctuations in the U.S. Dollar as compared to other currencies will impact revenue. Generally, strengthening of the U.S. Dollar will negatively impact revenue. Backlog is stated at historical foreign currency exchange rates, and revenue is released from backlog at current exchange rates, with any difference recorded as a backlog adjustment.

The COVID-19 pandemic has adversely impacted the pace of new orders and the pace at which our backlog converts to revenue in the near-term and we expect this to continue. Although the extent to which the COVID-19 pandemic will impact individual markets could vary based on a number of factors, we have seen and expect to continue to see a higher than normal level of age-outs in the coming quarters as a result.

78

Table of Contents

A summary of gross orders, net orders, and order backlog is as follows (in thousands):

Gross Orders and Book to Bill Ratio

Gross orders are defined as the sum of new orders recorded during the period adjusted for any revisions to existing orders during the period. Our book to bill ratio is defined as gross orders for the period divided by product revenue for the period.

Gross orders increased by $6.3 million for the year ended June 30, 2022, as compared to the year ended June 30, 2021. This was primarily due to an increase in CyberKnife platform orders and upgrades of $8.9 million and $2.0 million, respectively. TomoTherapy platform orders decreased by $5.8 million while upgrades increased by $2.1 million. In addition, gross order activity during the year ended June 30, 2021 was adversely impacted by the COVID-19 pandemic, particularly in the Americas region. Our book to bill ratio for June 30, 2022 was 1.5 as compared to 1.8 for June 30, 2021.

Gross orders decreased by $51.4 million for the year ended June 30, 2021, as compared to the year ended June 30, 2020. This was primarily due to a decline in China Class A system orders as the prior year order volume reflected significant pent-up demand from our end users and distributor, which was triggered by the announcement of the China Class A system quotas back in 2018. In addition, gross order activity during the year ended June 30, 2021 was adversely impacted by the COVID-19 pandemic, particularly in the Americas region. Accordingly, TomoTherapy platform order and upgrades order volume decreased by $48.3 million and $4.1 million, respectively, as compared to the prior year. CyberKnife platform orders decreased by $5.9 million while upgrades increased by $1.4 million. The decrease in CyberKnife platform orders was primarily due to the normalization of China Class A system orders for the year ended June 30, 2021 as compared to prior fiscal year where we experienced higher volumes of orders due to significant pent-up demand. Our book to bill ratio for June 30, 2021 was 1.8 as compared to 2.3 for June 30, 2020.

Net Orders

Net orders are defined as gross orders less cancellations, age-outs, foreign exchange and other adjustments during the period.

Net orders decreased by $24.6 million for the year ended June 30, 2022, as compared to the year ended June 30, 2021, resulting from an increase in age-outs of $35.0 million and an unfavorable impact of foreign currency exchange rates of $7.9 million offset by an increase in age-ins of $8.2 million, an increase in gross orders of $6.3 million, and a decrease in cancellations of $3.8 million.

•
The age-outs for the year ended June 30, 2022 were $183.8 million. There were $34.9 million of age-ins. Age-ins represent orders that previously aged-out but have been recognized as revenue in the current period, compared to $148.8 million of age-outs and $26.6 million of age-ins in the same period last fiscal year.

•
There were $11.3 million of cancellations in year ended June 30, 2022 as compared to $15.1 million of cancellations in the year ended June 30, 2021. Cancellations are outside of our control and are difficult to

79

Table of Contents

forecast; however, we continue to work closely with our customers to minimize the impact of cancellations on our business.

•
Foreign currency impacts and other adjustments decreased net orders by $4.7 million for the year ended June 30, 2022 compared to an increase in net orders by $3.2 million for the year ended June 30, 2021.

Net orders decreased by $88.7 million for the year ended June 30, 2021, as compared to the year ended June 30, 2020, resulting from a decrease of gross orders of $51.4 million, an increase in age-outs of $47.2 million, an increase in cancellations of $1.2 million, partially offset by an increase in age-ins of $6.1 million and a favorable impact of foreign currency exchange rates of $4.9 million.

•
The age-outs for the year ended June 30, 2021 were $122.1 million. There were $6.1 million of age-ins. Age-ins represent orders that previously aged-out but have been recognized as revenue in the current period, compared to $81.1 million of age-outs and $20.5 million of age-ins in the same period last fiscal year.

•
There were $15.1 million of cancellations in year ended June 30, 2021 as compared to $13.9 million of cancellations in the year ended June 30, 2020. Cancellations are outside of our control and are difficult to forecast; however, we continue to work closely with our customers to minimize the impact of cancellations on our business.

•
Foreign currency impacts and other adjustments increased net orders by $3.2 million for the year ended June 30, 2021 compared to a decrease in net orders by $1.7 million for the year ended June 30, 2020.

In recent years, the percentage of gross orders received from our distribution partners in the international markets represented 71%, 82%, and 76% of gross orders for fiscal year ended June 30, 2022, 2021 and 2020, respectively. We anticipate that distributor orders from international markets will continue to represent a significant portion of our gross orders in the foreseeable future. International orders are affected by foreign currency fluctuation as well as government programs that stimulate the purchase of healthcare products, both of which could affect the demand for our products and timing of orders from period to period. In addition, our order-to-revenue conversion cycle for international distributor orders has been generally longer compared to that of direct channel sales and could cause fluctuations in our age-outs from period to period.

Results of Operations

Fiscal 2022 results compared to 2021 (in thousands, except percentages)

(*) Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.

80

Table of Contents

(a)
Includes sales to the JV, an equity method investment of $55,877 and $24,393 for fiscal years ended June 30, 2022 and 2021, respectively. See Note 13.

Net revenue

Product Net Revenue

Product net revenue increased by $38.1 million for the year ended June 30, 2022 or 22%, as compared to the year ended June 30, 2021, primarily due to an increase in unit volume sales due to strong performance in the Americas region due to pent-up demand post-COVID coupled with an increase in system average product revenue. The increase is driven by an increase in revenue from the Americas, EMEA, and China regions offset by a unit volume decline in the Japan region.

Service Net Revenue

Service net revenue decreased by $4.4 million, or 2%, as compared to the year ended June 30, 2021, primarily due to a decrease in service contract revenue of $3.6 million driven by the strong US dollar that reduced the dollar value of all foreign currency service contract revenue, primarily in Japan and Europe, slightly offset by an increase in installation revenue.

Net revenue by geographic region, based on the shipping location of our customer, is as follows (in thousands, except percentages):

Gross profit

The overall gross profit for the year ended June 30, 2022 increased by $0.4 million, relatively flat as compared to the year ended June 30, 2021, due to an increase in product gross profit of $12.9 million, or 17%, driven by an increase in product revenue as a result of higher shipments offset by a decrease in service gross profit of $12.4 million or 15% driven by $8.0 million increase in service cost mainly due to higher part consumption and $4.4 million lower service revenue.

Research and development expenses

Research and development expenses increased by $5.0 million, or 10%, for the year ended June 30, 2022, as compared to the year ended June 30, 2021. The increase was driven by an increase of $4.3 million in compensation and employee benefits expenses mainly due to additional headcount and an increase of $1.2 million in outside services offset by a decrease of $0.5 million in operational cost due to a decrease in materials costs for research and development projects.

Selling and marketing expenses

Selling and marketing expenses increased $6.8 million, or 16%, for the year ended June 30, 2022, as compared to the year ended June 30, 2021. The increase was primarily driven by an increase of $4.1 million in compensation and benefits cost due to an increase in headcount, an increase of $2.0 million in marketing expenses due to a greater number of in-person tradeshows as compared to virtual tradeshows in the previous year and an increase of $1.3 million in traveling expenses.

81

Table of Contents

General and administrative expenses

General and administrative expenses increased by $2.7 million, or 6%, for the year ended June 30, 2022, as compared to the year ended June 30, 2021. The increase was primarily due to an increase of $1.3 million in operating cost due to increases in insurance premiums and higher bad debt expense and an increase of $0.9 million in outside services related to consulting fees and our reinstatement of compensatory fees for our board of directors in fiscal 2022.

Income on equity method investment, net

Income (loss) on equity method investment was an income of $0.2 million as compared to an income of $0.9 million during the year ended June 30, 2021.

Other expense, net

Other expense, net decreased by $17.3 million for the year ended June 30, 2022, as compared to the year ended June 30, 2021. The decrease was primarily related to lower interest cost due to lower interest rates on our debt in fiscal 2022 and the loss on extinguishment of old convertible notes in fiscal 2021. The impact of these items was partially offset by higher foreign currency exchange gain.

Provision for income taxes

The provision for income taxes was higher in fiscal 2022 as compared to fiscal 2021 primarily driven by a change in our permanent reinvestment assertion with respect to undistributed earnings in France, Japan and Switzerland.

Fiscal 2021 results compared to 2020 (in thousands, except percentages)

(*) Expressed as a percentage of total net revenue, except for product and services gross profits which are expressed as a percentage of related product and services revenue.

Net revenue

Product Net Revenue

Product net revenue increased by $9.3 million for the year ended June 30, 2021 or 6%, as compared to the year ended June 30, 2020, primarily due to an increase in unit volume sales coupled with an increase in system average product revenue of $18.8 million. The increase is driven by an increase in revenue from China, offset by a unit volume decline in the Americas, EMEA and Japan regions partly as a result of the impact of COVID-19 pandemic

82

Table of Contents

on revenue conversion timing with our customers in those regions and a decrease in system upgrades of $9.5 million due to the timing of release of ClearRT that was anticipated by customers during the fourth quarter of fiscal 2021.

Service Net Revenue

Service net revenue increased by $4.0 million, or 2%, as compared to the year ended June 30, 2020, primarily due to an increase in service contract revenue of $2.8 million, a reduced cost of service of $2.6 million, and an increase in upgrade and installation revenue of $1.8 million, offset by a decrease in training revenue and revenue from service parts.

Net revenue by geographic region, based on the shipping location of our customer, is as follows (in thousands, except percentages):

Gross profit

The overall gross profit for the year ended June 30, 2021 increased by $9.8 million, or 7%, as compared to the year ended June 30, 2020, due to an increase in service gross profit of $6.7 million, or 9%, driven by an increase in service contract revenue of $4.0 million including, upgrades and installation services, from an increase in the number of installed systems, coupled with a reduced cost of service of $2.6 million and an increase in product gross profit of $3.1 million, or 4%, which was driven by higher revenue from system unit sales volume coupled with an increase in system average product revenue.

Research and development expenses

Research and development expenses increased by $2.9 million, or 6%, for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The increase was driven by an increase of $2.5 million in compensation and employee benefits expenses mainly due to reinstatement of bonuses to employees in fiscal year 2021, which were suspended in fiscal year 2020 due to the COVID-19 pandemic and an increase of $2.2 million in outside services offset by a decrease of $0.7 million in travel expenses due to decreased travel as a result of travel restrictions in connection with the COVID-19 pandemic and a decrease of $0.5 million in facilities expenses.

Selling and marketing expenses

Selling and marketing expenses decreased $4.4 million, or 9%, for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The decrease was primarily driven by a decrease of $3.0 million due to the lower cost of key trade shows that were held virtually because of the COVID-19 pandemic, a decrease of $2.0 million in travel expenses, a decrease of $0.9 million in marketing promotion and materials and $0.2 million lower consulting expense, offset by an increase of $1.7 million in compensation and employee benefits mainly due to the reinstatement of bonuses to employees in fiscal year 2021, which were suspended in fiscal year 2020 due to the COVID-19 pandemic.

83

Table of Contents

General and administrative expenses

General and administrative expenses increased by $1.6 million, or 4%, for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The increase was primarily due to an increase of $2.6 million in compensation and employee benefits mainly due to the reinstatement of bonuses to employees in fiscal year 2021, which were suspended in fiscal year 2020 due to the COVID-19 pandemic, and an increase of $1.7 million this fiscal year compared to prior fiscal year due to the conclusion of a foreign indirect tax audit in fiscal year 2020 offset by a decrease in expense for allowance for credit losses of $1.6 million and a decrease in outside services and consulting of $1.2 million.

Income on equity method investment, net

Income (loss) on equity method investment was an income of $0.9 million as compared to a loss of $0.1 million during the year ended June 30, 2020.

Other expense, net

Other expense, net increased by $21.0 million for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The increase was primarily due to the non-cash gain of $13.0 million related to the value of the Accuray systems contributed to the JV in exchange for 49% equity interest that was recorded in fiscal year 2020, an increase of $5.7 million due to loss on extinguishment of debt and a $4.3 million due to loss on the exchange of our 3.75% Convertible Notes due 2022 that was treated as an extinguishment of old notes. The impact of these items was offset by an increase of $0.4 million in net foreign currency exchange gain, a decrease of $1.2 million in interest expense and a $0.2 million payment received for building improvements to a facility that was vacated in 2020.

Provision for income taxes

The provision for income taxes was lower in fiscal 2021 as compared to fiscal 2020 due to lower foreign earnings in fiscal 2021. We also released income tax benefits in fiscal 2020 related to final tax assessments from the Swiss tax authorities for the fiscal period 2018 that otherwise would have reflected a much higher income tax expense for us in fiscal 2020.

Share-Based Compensation Expense

In fiscal 2022, 2021 and 2020, we recorded share‑based compensation expense of $10.6 million, $9.3 million, and $8.2 million, respectively, related to awards under our stock incentive plans. Share‑based compensation expense was recorded net of estimated forfeitures. As of June 30, 2022, we had approximately $14.5 million of unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options, shares under our Employee Stock Purchase Plan, or ESPP, stock options and restricted stock units, or RSUs, which we expect to recognize over a weighted average period from 0.6 to 2.4 years.

Liquidity and Capital Resources

At June 30, 2022, we had $88.7 million in cash and cash equivalents. Cash from operations could be affected by various risks and uncertainties, including, but not limited to supply chain disruptions, rising interest rates and inflation, world events, including the Russian-Ukraine war, continuing uncertainty associated with COVID-19 and the risks included in Part I, Item 1A titled “Risk Factors.” Also refer to Note 10, Debt to the consolidated financial statements for discussion of the New Credit Facilities and the Notes as of June 30, 2022. Based on our cash and cash equivalents balance, available debt facilities, current business plan and revenue prospects, we believe that we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months. However, we continue to critically review our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic.

In May 2021, we issued $100.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2026 under an indenture between us and The Bank of New York Mellon Trust Company, N.A., as trustee. $97.1 million aggregate principal amount of the 3.75% Convertible Notes due 2026 were issued to certain holders of 3.75% Convertible Notes due 2022 in exchange for $82.1 million aggregate principal amount of 3.75% Convertible Notes due 2022 outstanding and $2.9 million aggregate principal amount were issued for cash. Concurrently, in May 2021, we entered into a senior secured credit agreement with Silicon Valley Bank, individually as a lender and agent, and

84

Table of Contents

the other lenders (the “Credit Agreement”), which provides for a new five-year $80 million term loan facility and a $40 million revolving credit facility (the “Revolving Credit Facility”). The initial borrowings under the Credit Agreement, including $25 million under the Revolving Credit Facility, were funded on May 14, 2021, and as of June 30, 2022 we had an outstanding balance under the Revolving Credit Facility of $5.0 million.

Our liquidity and cash flows has been and could continue to be materially impacted by the diversion of customer resources to the response to the COVID-19 pandemic as well as delays in payments from customers and could be further impacted by additional and prolonged delays in payments from customers, the potential risk mitigation measures, facility closures, or other reasons related to the COVID-19 pandemic. There remain uncertainties as to how the COVID-19 pandemic is likely to materially impact our liquidity in the future.

In addition, we are unable to predict with certainty the impact of the COVID-19 pandemic on our ability to maintain compliance with the debt covenants contained in the credit and security agreements related to our Credit Facilities, including financial covenants regarding the fixed charge coverage ratio and the consolidated senior net leverage ratio. While we were in compliance with such covenants for the year ended June 30, 2022, failure to meet the covenant requirements in the future could cause us to be in default and the maturity of the related debt could be accelerated and become immediately payable. This may require us to obtain waivers or amendments to the credit and security agreement in order to maintain compliance and there can be no certainty that any such waiver or amendment will be available, or what the cost of such waiver or amendment, if obtained, would be. If we are unable to obtain necessary waivers or amendment and the debt under such credit facility is accelerated, we would be required to obtain replacement financing at prevailing market rates, which may not be favorable to us. There is no guarantee that we would be able to satisfy our obligations if any of our indebtedness is accelerated.

Additionally, the undistributed earnings of our foreign subsidiaries at June 30, 2022 for all countries except Japan, France and Switzerland are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise. Repatriation of the Company’s foreign earnings from Japan, France and Switzerland are subject to income taxes. As of June 30, 2022, we had approximately $55.1 million of cash and cash equivalents at our foreign subsidiaries. When such funds are repatriated, there will be additional foreign tax withholdings imposed depending on the country from which the funds were repatriated.

In addition, the long sales cycle, together with delays in the shipment of CyberKnife and TomoTherapy platforms or customer cancellations that have increased in light of the COVID-19 pandemic have affected our ability to recognize revenue, which could adversely affect our cash flows.

Cash Flows

The COVID-19 pandemic has negatively impacted the global economy, disrupted our global supply chains and created significant volatility and disruption of financial markets all of which could negatively impact our business operations and cash flows for the foreseeable future, including reductions in revenue and delays in payments from customers. The challenges posed by COVID-19 on our business are expected to evolve rapidly. An extended period of global supply chain and economic disruption and volatility in the financial markets, could materially affect our business, results of operations, access to sources of liquidity and financial condition.

85

Table of Contents

Cash Flows From Operating Activities

Net cash used in operating activities was $2.4 million in fiscal 2022, resulting primarily from changes in working capital of $22.6 million and a net loss of $5.3 million offset by $25.5 million of non cash items.

•
The net change in working capital was primarily due to increases of $22.9 million in inventories, $12.5 million in accounts receivable, $6.0 million in prepaid expenses and other assets, and decreases of $0.8 million in operating lease liabilities and $1.4 million in deferred revenues, offset by increases of $11.7 million in accounts payable, $6.7 million in accrued liabilities, $1.2 million in customer advances and decrease of $1.5 million in deferred costs.

•
Non-cash items primarily consisted of share-based compensation expense of $10.6 million, depreciation and amortization expense of $5.5 million, a write-down of inventory of $3.5 million, profit elimination in transactions with the JV of $3.3 million, and provision for deferred income tax of $1.8 million.

Net cash provided by operating activities was $38.5 million in fiscal 2021, resulting primarily from non cash items of $39.4 million and changes in working capital of $7.6 million offset by, a net loss of $6.3 million.

•
Non-cash items primarily consisted of the loss on extinguishment of debt of $4.3 million related to the exchange of our 3.75% Convertible Notes due 2022 for our 3.75% Convertible Notes due 2026 and $5.7 million related to refinancing of our credit facilities with new lenders, depreciation and amortization expense of $6.4 million, share-based compensation expense of $9.3 million, inventories write-down of $6.9 million, non-cash interest expense on debt of $4.9 million, amortization of debt issuance cost of $1.4 million and intra-entity profit elimination from transactions with the JV of $0.3 million, offset by an in-kind system upgrade contribution to the JV of $1.4 million and an income on equity method investment of $0.9 million;

•
The net change in working capital of $7.6 million was primarily due to an increase of $8.1 million in compensation related accrued liabilities due to bonus accrual, a decrease in accounts receivable of $5.2 million and a decrease of $1.7 million in inventories offset by a decrease of $4.0 million in accounts payable, a decrease of $1.6 million in customer advances, deferred revenue and deferred cost of revenue, an increase of $1.0 million in prepaid expenses and other assets and a decrease of $0.7 million in net operating lease liabilities.

Net cash used in operating activities was $1.5 million in fiscal 2020, resulting primarily from a net negative change in working capital of $21.2 million offset by non cash items of $15.9 million and a net income of $3.8 million.

•
Non-cash items primarily consisted of the gain on contribution to the JV of $13.0 million, offset by depreciation and amortization expense of $7.5 million, share-based compensation expense of $8.2 million, non-cash interest expense on debt of $4.2 million, inventories write-down of $4.2 million, provision of bad debt of $1.8 million, intra-entity profit elimination from transactions with the JV of $1.8 million, amortization of debt issuance cost of $1.3 million, deferred tax benefit of $0.4 million and a loss on equity method investment of $0.1 million;

•
The net change in operating assets and liabilities of $21.2 million was primarily due to an increase of $23.2 million in inventories due to slower than anticipated conversion of our order backlog to revenue, a decrease of $16.6 million in compensation related accrued liabilities and reduction in bonus accrual, a decrease of $6.8 million in accounts payable and a decrease of $0.2 million in net operating lease liabilities offset by receivable collection and a decrease in accounts receivable of $19.0 million, a decrease of $4.4 million in prepaid expense and other assets and an increase of $1.5 million in customer advances, deferred revenue and deferred cost of revenue.

86

Table of Contents

Cash Flows From Investing Activities

Net cash used in investing activities was $4.7 million in fiscal 2022, which primarily related to the purchase of property and equipment of $4.7 million.

Net cash used in investing activities was $2.4 million in fiscal 2021, which primarily related to the purchase of property and equipment of $2.3 million and an additional investment in the JV of $0.1 million.

Net cash used in investing activities was $3.7 million in fiscal 2020, which primarily consisted of purchases of property and equipment.

Cash Flows From Financing Activities

Net cash used in financing activities during fiscal 2022 was $15.4 million, which was primarily due to $15.0 million of repayments under Revolving Credit Facility and $4.0 million paydown in debt offset by $2.3 million in proceeds from employee stock plans and proceeds from options exercises.

Net cash used in financing activities during fiscal 2021 was $28.8 million, primarily due to the repayment of all outstanding obligations and termination of the Prior Revolving Credit Facility and Prior Term Loan of $105.4 million, the prepayment during the year of $10.0 million of the principal amount outstanding on our Prior Term Loan, the amendment fee of $0.5 million related to our Prior Credit Facilities, the repurchase of our common stock of $14.1 million, the paydown on our New Revolving Credit Facility of $5.0 million, $0.1 million net cost related to the exchange of our 3.75% Convertible Notes 3.75% due 2022 for our 3.75% Convertible Notes due 2026 and $0.3 million in taxes paid related to net settlement of equity awards, offset by net proceeds from New Revolving Credit Facility and New Term Loan Facility of $103.7 million, proceeds from employee stock plans of $2.2 million and proceeds from exercises of stock options of $0.9 million.

Net cash provided by financing activities during fiscal 2020 was $26.7 million, which was primarily due to a net draw of $24.7 million, net, drawn against our Prior Term Loan Facility and $2.5 million in proceeds from our employee stock purchase plan offset by $0.3 million, net repayments under our Prior Revolving Credit Facility and $0.2 million in taxes paid related to the net share settlement of equity awards.

Operating Capital and Capital Expenditure Requirements

Our future capital requirements depend on numerous factors. These factors include but are not limited to the following:

•
Revenue generated by sales of our products and service plans;

•
Our ability to generate cash flows from operations;

•
Costs associated with our sales and marketing initiatives and manufacturing activities;

•
Facilities, equipment and IT systems required to support current and future operations;

•
Rate of progress and cost of our research and development activities;

•
Costs of obtaining and maintaining FDA and other regulatory clearances of our products;

•
Effects of competing technological and market developments;

•
Number and timing of acquisitions and other strategic transactions;

•
Servicing and maturity of our current future indebtedness;

•
The impact of inflation of our expenses; and

87

Table of Contents

•
The unpredictable impact of the COVID-19 pandemic, including on collections, supply chains and logistics.

We believe that our current cash and cash equivalents balance will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If these sources of cash and cash equivalents are insufficient to satisfy our liquidity requirements, or we believe market conditions are favorable, we may seek to sell additional equity or debt securities or enter into additional credit facilities. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Additional financing may not be available at all, or in amounts or on terms acceptable to us. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Operating and Capital Expenditure Requirements and Contractual Obligations

Our purchase commitments and obligations include all open purchase orders and contractual obligations in the ordinary course of business, including commitments with contract manufacturers and suppliers, for which we have not received the goods or services and acquisition and licensing of intellectual property. A majority of these purchase obligations are due within a year. Although open purchase orders are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to the delivery of goods or performance of services. Our long-term material cash requirements include lease obligations. See Note 5. Leases.

Off Balance Sheet Arrangements

At June 30, 2022 we had open currency forward contracts to purchase or sell foreign currencies with a stated, or notional, value of approximately $68.3 million. The fair value of the underlying currency based upon the June 30, 2022 exchange rate was approximately $68.3 million. At June 30, 2021 we had open currency forward contracts to purchase or sell foreign currencies with a stated, or notional, value of approximately $54.2 million. The fair value of the underlying currency based upon the June 30, 2022 exchange rate was approximately $54.2 million. We did not have any off balance sheet arrangements for the year ended June 30, 2020.

Critical Accounting Estimates

The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. However, the economic uncertainty in the current environment caused by the COVID-19 pandemic could limit our ability to accurately make and evaluate our estimates and judgments. Actual results could therefore differ materially from those estimates if actual conditions differ from our assumptions.

88

Table of Contents

All of our significant accounting policies and methods used in the preparation of our consolidated financial statements are described in Note 1, The Company and its Significant Accounting Policies, to the consolidated financial statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Management believes the critical accounting policies and estimates are those related to revenue recognition, assessment of recoverability of goodwill, valuation of inventories, convertible notes, impairment of investments and allowance for credit losses.

Concentration of Credit and Other Risks

Our cash and cash equivalents are deposited with several major financial institutions. At times, deposits in these institutions exceed the amount of insurance provided on such deposits. We have not experienced any losses in such accounts and do not believe that we are exposed to any significant risk of loss on these balances.

For the year ended June 30, 2022 there was one customer that represented 10% or more of total net revenue and for the years ended June 30, 2021 and 2020, there were one and no customers, respectively, that represented 10% or more of total net revenue. We had two customers as of June 30, 2022 and two customers as of June 30, 2021, respectively, that each accounted for more than 10% of our total accounts receivable, net.

We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. Accounts receivable are deemed past due in accordance with the contractual terms of the agreement. Accounts receivable balances are charged against the allowance for doubtful accounts once collection efforts are unsuccessful.

Single-source suppliers presently provide us with several components. In most cases, if a supplier was unable to deliver these components, we believe that we would be able to find other sources for these components subject to any regulatory qualifications, if required.

Revenue Recognition

Our revenue is primarily derived from sales of CyberKnife and TomoTherapy platforms and services, which include PCS contracts (warranty period services and post-warranty services), installation services, training and other professional services. We record our revenue net of any value added or sales tax. We recognize revenue for certain performance obligations at the point in time when control is transferred, such as delivery of products. We recognize 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. Payments received in advance of system shipment are recorded as customer advances and are deferred until product shipment when they are recognized in revenue. We assess the probability of collection based on a number of factors, including past transaction history with the customer and creditworthiness of the customer. We generally do not request collateral from our customers.

We frequently enter into sales arrangements that contain multiple performance obligations. For sale arrangements that contain multiple performance obligations, we account 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 relative its own or with other resources that are readily available to the customer. The stand-alone selling price (“SSP”). The SSP is determined based on observable prices at which we separately sell the products and services. If a SSP is not directly observable, then we will estimate the SSP considering market conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

Product Revenue

The majority of product revenue is generated from sales of CyberKnife and TomoTherapy platforms, including Radixact Systems. Revenue is recognized once the performance obligations are satisfied by transferring control of the product to a customer, which is generally upon delivery.

We record revenue from sales of systems, product upgrades and accessories to our customers based on the general terms and conditions of the executed sales and distribution agreements as well as the specific terms and conditions executed for each sale, and once the performance obligations are satisfied by transferring control of the product to a customer.

89

Table of Contents

We record revenue considering all discounts given to, or expected by, customers. As a result, management may make estimates of potential future product returns or trade ins and other allowances related to product revenue in the current period. In general, we do not allow returns from customers and all discounts and allowances are clearly identified in the terms and conditions of each sale. We derive some product revenue from sales to the JV.

Service Revenue

Service revenue is generated primarily from PCS, installation services, training and professional services. Service revenue is recognized either ratably over the contractual period as control and benefit transfer to the customer or when service is performed, depending on specific terms and conditions in agreements with customers. We derive some service revenue from sales to the JV.

Costs associated with service revenue are expensed when incurred, except when those costs are related to system upgrades purchased within a service contract. In those cases, the costs of such upgrades are recognized at the time control and benefit of the upgrade transfers to the customer.

Assessment of Recoverability of Goodwill

Goodwill represents the excess of the purchase price over the fair value of tangible and identified intangible net assets of businesses acquired. Goodwill is not amortized, but is evaluated for impairment on an annual basis and when impairment indicators are present. We have one operating segment and one reporting unit. Therefore, our consolidated net assets, including existing goodwill are considered to be the carrying value of the reporting unit. We estimate the fair value of the reporting unit based on the closing price of our common stock on the trading day closest to the annual review date multiplied by the outstanding shares on that date. If the carrying value of the reporting unit is in excess of its fair value, an impairment may exist, and we must perform the second step of the analysis, in which the implied fair value of the goodwill is compared to its carrying value to determine the impairment charge, if any. If the estimated fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and no further analysis is required.

Valuation of Inventories

The valuation of inventory requires us to estimate obsolete or excess inventory as well as damaged inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products. We regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand to support future sales and service. If our demand forecast for specific products is greater than actual demand and we fail to reduce purchasing and manufacturing output accordingly, we could be required to write off inventory beyond the current reserve, which would negatively impact our gross margin.

Convertible Notes

We account for convertible notes in accordance with applicable guidance which specifies that an issuer of such instruments should separately account for the liability and equity component of the conversion option. The amount recorded as debt is based on the fair value of the debt component as a standalone instrument, determined based on an implied credit spread interest rate for nonconvertible debt. This implied credit spread was derived from the trading history of our convertible notes and a range of estimated market volatility. The difference between the debt recorded at inception and its principal amount is accreted to principal during the estimated life of the note. ASC 470-50, provides guidance on modifications to or exchanges of line-of-credit or revolving arrangements which should be evaluated based on borrowing. We adopted ASU 2020-06 in fiscal year 2022, using the modified retrospective method, which no longer accounts for the liability and equity component separately.

Impairment of Investments

We have an equity investment in CNNC Accuray (Tianjin) Medical Technologies Co. Ltd., the Company’s joint venture in China. The Company’s equity method investment is held at cost and adjusted for impairment when it would be deemed to be impaired. We monitor this investment for events or circumstances indicative of a potential

90

Table of Contents

impairment, and we make appropriate reductions in carrying value if we determine that an impairment charge is required, based primarily on the financial condition or near term prospects of the investee.

Allowance for Credit Losses

We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If our evaluation of our customers’ financial conditions does not reflect our future ability to collect outstanding receivables, additional provisions may be needed and our operating results could be negatively affected.

Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our consolidated financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward‑looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward‑looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report on Form 10‑K, particularly in “Risk Factors.” See “Special Note Regarding Forward‑Looking Statements.”

Overview

Company

We are a radiation therapy company that develops, manufactures, sells and supports market-changing solutions that are designed to deliver radiation treatments for even the most complex cases, while making commonly treatable cases even more straightforward, to meet the full spectrum of patient needs. We believe in comparison to conventional linear accelerators, the company’s treatment delivery, planning, and data management solutions provide better accuracy, flexibility, and control; fewer treatments with shorter treatment times; and the technology to expand beyond cancer, making it easier for clinical teams around the world to provide treatments that help patients get back to living their lives, faster.

Our innovative technologies, the CyberKnife® and TomoTherapy® platforms, including the Radixact® System, our next generation TomoTherapy platform, are designed to deliver advanced treatments, including stereotactic radiosurgery (SRS), stereotactic body radiation therapy (SBRT), intensity modulated radiation therapy (IMRT), image-guided radiation therapy (IGRT), and adaptive radiation therapy (ART). The CyberKnife and TomoTherapy platforms have complementary clinical applications with the same goal: to empower our customers to deliver the most precise and accurate treatments while still minimizing dose to healthy tissue, helping to reduce the risk of side effects that may impact patients’ quality of life. Each of these systems serves patient populations treated by the same medical specialty, radiation oncology, with advanced capabilities. The CyberKnife platform is also used by neuro-radiosurgeons to treat patients with tumors in the brain and neurologic disorders. In addition to these platforms, we also provide services, which include post-contract customer support (warranty period services and post warranty services), installation services, training, and other professional services.

The CyberKnife Platform

The CyberKnife platform has evolved over the years reflecting innovation in its hardware and software. The platform is comprised of the only full-body stereotactic radiosurgery (SRS) and stereotactic body radiation therapy (SBRT) robotic systems on the market - including the CyberKnife M6™ and S7™ Systems. These systems have the option of fixed collimator, Iris™ Variable Aperture Collimator and the InCise™ Multileaf Collimator (MLC). With the InCise MLC, clinicians can deliver the same precise SRS and SBRT treatments they have come to expect with the CyberKnife System, faster and for a wider range of tumor types than prior configurations of the CyberKnife System. The use of SRS and SBRT with the CyberKnife platform to treat tumors throughout the body has grown significantly in recent years. SRS and SBRT is performed on an outpatient basis in a limited number of treatment sessions - typically 1-5 fractions. It enables the treatment of patients who might not otherwise be treated with radiation, who may not be good candidates for surgery, or who desire non-surgical treatments.

In 2018, we introduced the new release of our Precision® Treatment Planning System (TPS) with the VOLO Optimizer software upgrade for the CyberKnife M6 System, enabling customers to significantly improve operational efficiency by reducing both the time to create high quality treatment plans and the time it takes to deliver patient treatments. The next-generation TPS with the optimizer facilitates the development of clinically optimal treatment plans up to 90 percent faster than before and the delivery of the treatment up to an estimated 50 percent faster than before the availability of the new software, allowing CyberKnife treatments to typically be performed in 15 to 30 minutes.

69

In June 2020, we launched the CyberKnife S7 System, an innovative device combining speed, advanced precision, and real-time artificial intelligence-driven motion tracking and synchronization treatment delivery for all stereotactic radiosurgery (SRS) and stereotactic body radiation therapy (SBRT) treatments in as little as 15 minutes. The CyberKnife S7 System is the next-generation CyberKnife platform, a robotic, non-invasive radiation therapy device capable of treating cancerous and benign tumors throughout the body, as well as neurologic disorders. The CyberKnife S7 System, with Synchrony® Motion Synchronization and Real-Time Adaptive Radiotherapy Technology and the VOLO™ Optimizer, facilitates the delivery of accurate, sub-millimeter, (ultra) hypofractionated treatments to tumors throughout the body, and even to targets that move.

We believe the long-term success of the CyberKnife platform is dependent on a number of factors including the following:

TomoTherapy Platform

The TomoTherapy platform consists of advanced, fully integrated and versatile radiation therapy systems designed to deliver IG-IMRT for the treatment of a wide range of cancer types. The TomoTherapy platform includes the TomoTherapy H Series, with configurations of TomoH®, TomoHD®, and TomoHDA™. Based on a CT scanner platform, the systems provide continuous delivery of radiation from multiple 360 degree rotations around the patient, or delivery from clinician-specified beam angles. These unique features, combined with daily 3D image guidance, enable physicians to deliver highly accurate, individualized dose distributions which precisely conform to the shape of the patient’s tumor while minimizing dose to normal, healthy tissue and the risk of side effects for the patient. The TomoTherapy platform is capable of treating all standard radiation therapy indications including breast, prostate, lung, and head and neck cancers, in addition to complex and novel treatments such as total marrow irradiation. The Radixact® System, the next-generation TomoTherapy platform, includes our integrated Accuray Precision® treatment planning software and iDMS® Data Management System. The Radixact System leverages a unique ring gantry architecture to enable helical image acquisition and dose delivery, enabling precise radiation treatments for more patients, faster, with simpler, more automated workflows.

70

Our Synchrony Motion Synchronization and Real-Time Adaptive Radiotherapy Technology for the Radixact System adds intrafraction motion synchronization capabilities to the Radixact System, enabling real-time tracking, visualization and correction for tumor motion during treatment, with the goal of improving dose accuracy and treatment times as compared to conventional radiation therapy systems.

Most recently, we received FDA 510(k) clearance, Shonin approval from the Japanese Ministry of Health, Labor and Welfare (MHLW), and CE Mark certification for our uniquely innovative ClearRT™ helical kVCT imaging technology for the Radixact System. ClearRT imaging brings low dose diagnostic-like kVCT imaging quality, the largest imaging field of view available on a radiation delivery system at 50 cm (diameter) by 135 cm (long), and speed, as evidenced by its ability to capture a 1-meter image in only 1 minute. Furthermore, ClearRT helical kVCT imaging can be used directly in the adaptive dose monitoring process, and when required, ClearRT native image sets can be used for new plan creation.

We believe the Radixact System and other TomoTherapy Systems offer clinicians and patients significant benefits over other vendors’ radiation therapy systems in the market. We believe our ability to capture more sales will be influenced by a number of factors including the following:

Sale of Our Products

Generating revenue from the sale of our platforms is a lengthy process. Selling our platforms, from first contact with a potential customer to a signed sales contract that meets our backlog criteria (as discussed below) varies significantly and generally spans between six months and two years. The length of time between receipt of a signed contract and revenue recognition is generally governed by the time required by the customer to build, renovate or prepare the treatment room for installation of the platform.

In the United States, we primarily market directly to customers, including hospitals and stand-alone treatment facilities, through our sales organization and we also market to customers through sales agents and group purchasing organizations. Outside the United States, we market to customers directly and through distributors and sales agents. In addition to our offices in the United States, we have sales and service offices in Europe, Asia, and South America.

As of June 30, 2021, our systems were named in 74 out of 90 Class A user licenses awarded by the China National Health Commission. The Chinese Ministry of Health requires a tender process following the license awards for all participating end user hospitals prior to being able to take receipt of a Class A device. This tender process defines the transactional terms and conditions related to each hospital’s equipment order and does not put us in a competitive bidding situation that would result in changes in the specific device for which the hospital has received the Class A user license. During the year ended June 30, 2021, we delivered Class A devices to China and recognized system revenue related to such devices of approximately $54.2 million in the same period. We currently anticipate system revenue related to the remaining Class A user licenses awarded to date in the next 12 to 18

71

months. Despite the challenges and uncertainties created by the COVID-19 pandemic in China and around the world, we continue to believe that China remains the world’s fastest growing market for radiation oncology systems and the pandemic does not affect the long-term demand for radiotherapy equipment in China.

Joint Venture

In January 2019, our wholly-owned subsidiary, Accuray Asia Limited (“Accuray Asia”), entered into an agreement with CNNC High Energy Equipment (Tianjin) Co., Ltd. (the “CIRC Subsidiary”), a wholly-owned subsidiary of China Isotope & Radiation Corporation, to form a joint venture, CNNC Accuray (Tianjin) Medical Technology Co. Ltd. (the “JV”), to manufacture and sell radiation oncology systems in China. The JV aims to be uniquely positioned to serve China, which we believe is the world’s largest growth market for radiation oncology systems. China represents a significantly underserved market for linacs based on the country’s population and cancer incidence rates on both an absolute and relative country basis. Accuray Asia has a 49% ownership interest in the JV and the CIRC Subsidiary has a 51% ownership interest in the JV.

In exchange for the 49% equity interest in the JV, we, through Accuray Asia, made in-kind contributions consisting of two full radiation oncology systems from our inventory in the quarter ended December 31, 2019. The investment is reported as an Investment in unconsolidated joint venture on our condensed consolidated balance sheets. We recognized a gain of $13.0 million related to the value of the capital contribution to the JV. This gain was recorded as non-operating, other income for the quarter ended December 31, 2019.

In July 2019, the JV broke ground on its facility based in Tianjin, China, which is expected to serve as headquarters and home of its manufacturing, sales organization and service operations, and also received the Radiation Safety License from the China Ministry of Environmental Protection. This license, along with the license to do business in China and the Medical Device Operating Permit, which were both received in 2019, enables the JV to sell, install and provide further service to our radiation therapy devices in China. The JV manufacturing facility construction was completed in 2020, and Quality Management System certificated with ISO13485 standard. The China made medical device type testing is on going and NMPA submission expected to finish in the fourth calendar quarter of 2021.

With the receipt of the necessary permits and licenses to operate, the JV has begun selling products in China, much like a distributor. In the long term, we anticipate that the JV will manufacture and sell a locally branded “Made in China” radiotherapy device in the Class B license category, which would replace our current offering in that category. We believe this strategy will allow us to best maximize both near and longer-term opportunities in China.

We are applying the equity method of accounting to our ownership interest in the JV as we have the ability to exercise significant influence over the JV but lack controlling financial interest and are not the primary beneficiary. We recognize revenue on sales to the JV in the current period, eliminating a portion of profit to the extent goods sold have not been sold through by the JV to an end customer at the end of each reporting period. We will recognize the 49% proportionate share of the JV income or loss from the JV on a one-quarter lag due to the timing of the availability of the JV’s financial records. We deferred $2.1 million and $1.8 million of intra-entity profit margin as of June 30, 2021 and June 30, 2020, respectively. During the year ended June 30, 2021, we recognized $1.8 million of previously deferred intra-entity profit margin from sales and recorded intra-entity profit margin deferral of $2.1 million from sales executed during the period. Our consolidated accumulated deficit includes $0.9 million of accumulated income related to our equity method investment.

As of June 30, 2021, we had a carrying value of $15.9 million in the JV and owned a 49% interest in the entity. Our proportional share of the underlying equity in net assets of the JV was approximately $13.7 million. The difference of $2.2 million, increased by $2.1 million eliminated intra-entity profit, constitutes equity method goodwill of $4.4 million at June 30, 2021, including $0.1 million annual impact of foreign currency exchange gain, and is subject to impairment analysis annually during the quarter ending March 31, 2021. No impairment was identified as of June 30, 2021.

72

COVID-19 Pandemic

In fiscal year 2020, an outbreak of a novel strain of coronavirus, SARS-CoV-2, which causes coronavirus disease 2019 (“COVID-19”) was identified in December 2019 in China and was subsequently recognized as a pandemic by the World Health Organization. The COVID-19 pandemic severely restricted the level of economic activity around the world and while conditions have improved, the pace and degree of recovery varies significantly. In response to this pandemic, governments and private industry have taken preventative or protective actions, such as imposing restrictions on travel and business operations, which has resulted in the temporary or permanent closure of certain businesses, as well as advising or requiring individuals to limit or forego their time outside of their homes. The COVID-19 pandemic has adversely impacted our business operations as well as those of our customers and partners. In addition, across the healthcare industry, resources are being prioritized for the treatment and management of the pandemic and away from non-urgent or elective procedures. Some of our customers, which include hospitals, major academic medical centers, and other related entities, have incurred losses during the COVID-19 pandemic due to significantly reduced patient volume. The public health actions being undertaken to reduce the spread of the virus have created and may continue to create significant disruptions with respect to demand for our products and services; the operating procedures and workflow of our customers, particularly hospitals; our ability to continue to manufacture our products; and the reliability of our supply chain.

Our financial results have also been affected by the COVID-19 pandemic in various ways. The COVID-19 pandemic is adversely impacting the pace at which our backlog converts to revenue in the near-term. This is primarily the result of delays in the timing of deliveries and installations in fiscal 2021 caused by the COVID-19 pandemic, which resulted in a decline to our revenue for the same period. We expect that such delays in deliveries and installations will continue into fiscal 2022, which could have a negative impact on our revenue during those periods. We have also experienced disruptions in our sales as well as declines in deliveries and installations of our products, which has adversely impacted the pace at which our backlog converts to revenue. We have also experienced delays in customer payments and delays in planned installations as a result of changes to and redirection of customer resources to the response to the COVID-19 pandemic and closures of customer facilities. We have also received requests from a few customers to extend payment terms or temporarily suspend service and corresponding payment obligations and while we have only received a small number of requests thus far, there can be no guarantee that more customers will not ask for the same if the effects of the COVID-19 pandemic worsen or continue for an extended period. As a result, we are carefully monitoring the pandemic and the potential length and depth of the resulting economic impact, as well as the timing and extent of an economic recovery, on our financial condition and results of operations. However, given the uncertainty regarding the spread, severity and potential resurgence of COVID-19 and how long the pandemic and associated health measures will last, the related financial impact cannot be reasonably estimated at this time. We expect that the impacts on our customers’ business and our business will continue until the pandemic subsides and related public health measures are reduced or eliminated.

We intend to continue to execute on our strategic plans and operational initiatives during the COVID-19 pandemic. However, the extent to which our operations and financial condition are affected by the COVID-19 pandemic, including our ability to execute our business strategies and initiatives in the expected time frame, will largely depend on future developments that cannot be accurately predicted at this time and are uncertain, including new information that may emerge concerning the severity and scope of the COVID-19 pandemic (including whether there is a resurgence or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate), new or additional actions taken to contain COVID-19 or address its impact, the availability and effect of vaccines, the spread of variants, changes in economic consumer behavior and the timing of global recovery and economic normalization, among other uncertainties and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-K, may result in delays or modifications to these plans and initiatives. Accordingly, management is carefully evaluating the Company’s liquidity position, communicating with and monitoring the actions of our customers and suppliers, and reviewing our near-term financial performance as the uncertainty related to the pandemic continues to unfold.

73

Backlog

As of June 30, 2021, backlog totaled $616.4 million, of which $2.0 million represented upgrades sold through service contracts. As of June 30, 2020, backlog totaled $602.7 million.

In order for the product portion of a system sales agreement to be counted as backlog, it must meet the following criteria:

Although our backlog includes only contractual agreements with our customers for the purchase of our CyberKnife or TomoTherapy platforms, including Radixact Systems and related upgrades, we cannot provide assurance that we will convert backlog into recognized revenue due primarily to factors outside of our control. The amount of backlog recognized into revenue is primarily impacted by three items: cancellations, age-outs and foreign currency fluctuations. Orders could be cancelled for reasons including, without limitation, changes in customers’ needs or financial condition, changes in government or health insurance reimbursement policies, or changes to regulatory requirements. In addition to cancellations, after 2.5 years, if we have not been able to recognize revenue on a contract, we remove the revenue associated with the contract from backlog and the order is considered aged out. Contracts may age-out for many reasons, including but not limited to, inability of the customer to pay, inability of the customer to adapt their facilities to accommodate our products in a timely manner, or inability to timely obtain licenses necessary for customer facilities or operation of our equipment. Our backlog also includes amounts not denominated in U.S. Dollars and therefore fluctuations in the U.S. Dollar as compared to other currencies will impact revenue. Generally, strengthening of the U.S. Dollar will negatively impact revenue. Backlog is stated at historical foreign currency exchange rates, and revenue is released from backlog at current exchange rates, with any difference recorded as a backlog adjustment.

The COVID-19 pandemic has adversely impacted the pace of new orders and the pace at which our backlog converts to revenue in the near-term and we expect this to continue. Although the extent to which the COVID-19 pandemic will impact individual markets could vary based on a number of factors, we have seen and expect to continue to see a higher than normal level of age-outs as a result.

A summary of gross orders, net orders, and order backlog is as follows (in thousands):

74

Gross Orders

Gross orders are defined as the sum of new orders recorded during the period adjusted for any revisions to existing orders during the period.

Gross orders decreased by $51.4 million for the year ended June 30, 2021, as compared to the year ended June 30, 2020. This was primarily due to a decline in China Class A system orders as the prior year order volume reflected significant pent-up demand from our end users and distributor, which was triggered by the announcement of the China Class A system quotas back in 2018. In addition, gross order activity during the year ended June 30, 2021 was adversely impacted by the COVID-19 pandemic, particularly in the Americas region. Accordingly, TomoTherapy platform order and upgrades order volume decreased by $48.3 million and $4.1 million, respectively, as compared to the prior year. CyberKnife platform orders decreased by $5.9 million while upgrades increased by $1.4 million. The decrease in CyberKnife platform orders was primarily due to the normalization of China Class A system orders this fiscal year as compared to prior fiscal year where we experienced higher volumes of orders due to significant pent-up demand.

Gross orders increased by $35.0 million for the year ended June 30, 2020, as compared to the year ended June 30, 2019. This was primarily a result of an increase of $32.1 million in new system order volume compared to the same prior year period, primarily related to a $31.1 million increase of TomoTherapy System orders, a $1.0 million increase in CyberKnife System orders and an increase of $2.9 million in upgrade orders and other amendments to the terms of our contracts as compared to the same prior year period.

Net Orders

Net orders are defined as gross orders less cancellations, age-outs, foreign exchange and other adjustments during the period.

Net orders decreased by $88.7 million for the year ended June 30, 2021, as compared to the year ended June 30, 2020, resulting from a decrease of gross orders of $51.4 million, an increase in age-outs of $47.2 million, an increase in cancellations of $1.2 million, offset by an increase in age-ins of $6.1 million and a favorable impact of foreign currency exchange rates of $4.9 million.

75

Net orders increased by $62.3 million for the year ended June 30, 2020, as compared to the year ended June 30, 2019, resulting from an increase in gross orders of $35.0 million, decreased net age-outs of $14.4 million and cancellations of $11.1 million, in addition to favorable impact of foreign currency exchange of $1.8 million as compared to same to the same prior year period.

In recent years, the percentage of gross orders received from our distribution partners in the international markets represented 82%, 76%, and 83% of gross orders for fiscal year ended June 30, 2021, 2020 and 2019, respectively. We anticipate that distributor orders from international markets will continue to represent a significant portion of our gross orders in the foreseeable future. International orders are affected by foreign currency fluctuation as well as government programs that stimulate the purchase of healthcare products, both of which could affect the demand for our products and timing of orders from period to period. In addition, our order-to-revenue conversion cycle for international distributor orders has been generally longer compared to that of direct channel sales and could cause fluctuations in our age-outs from period to period.

Results of Operations

Fiscal 2021 results compared to 2020 (in thousands, except percentages)

Net revenue

76

Product Net Revenue

Product net revenue increased by $9.3 million for the year ended June 30, 2021 or 6%, as compared to the year ended June 30, 2020, primarily due to an increase in unit volume sales coupled with an increase in system average product revenue of $18.8 million. The increase is driven by an increase in revenue from China, offset by a unit volume decline in the Americas, EMEA and Japan regions partly as a result of the impact of COVID-19 pandemic on revenue conversion timing with our customers in those regions and a decrease in system upgrades of $9.5 million due to the timing of release of ClearRT that was anticipated by customers during the fourth quarter of fiscal 2021.

Service Net Revenue

Service net revenue increased by $4.0 million, or 2%, as compared to the year ended June 30, 2020, primarily due to an increase in service contract revenue of $2.8 million, a reduced cost of service of $2.6 million, and an increase in upgrade and installation revenue of $1.8 million, offset by a decrease in training revenue and revenue from service parts.

Net revenue by geographic region, based on the shipping location of our customer, is as follows (in thousands, except percentages):

Gross profit

The overall gross profit for the year ended June 30, 2021 increased by $9.8 million, or 7%, as compared to the year ended June 30, 2020, due to an increase in service gross profit of $6.7 million, or 9%, driven by an increase in service contract revenue of $4.0 million including, upgrades and installation services, from an increase in the number of installed systems, coupled with a reduced cost of service of $2.6 million and an increase in product gross profit of $3.1 million, or 4%, which was driven by higher revenue from system unit sales volume coupled with an increase in system average product revenue.

Research and development expenses

Research and development expenses increased by $2.9 million, or 6%, for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The increase was driven by an increase of $2.5 million in compensation and employee benefits expenses mainly due to reinstatement of bonuses to employees in fiscal year 2021, which were suspended in fiscal year 2020 due to the COVID-19 pandemic and an increase of $2.2 million in outside services offset by a decrease of $0.7 million in travel expenses due to decreased travel as a result of travel restrictions in connection with the COVID-19 pandemic and a decrease of $0.5 million in facilities expenses.

Selling and marketing expenses

Selling and marketing expenses decreased $4.4 million, or 9%, for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The decrease was primarily driven by a decrease of $3.0 million due to the lower cost of key trade shows that were held virtually because of the COVID-19 pandemic, a decrease of $2.0 million in travel expenses, a decrease of $0.9 million in marketing promotion and materials and $0.2 million lower consulting expense, offset by an increase of $1.7 million in compensation and employee benefits mainly due to the reinstatement of bonuses to employees in fiscal year 2021, which were suspended in fiscal year 2020 due to the COVID-19 pandemic.

77

General and administrative expenses

General and administrative expenses increased by $1.6 million, or 4%, for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The increase was primarily due to an increase of $2.6 million in compensation and employee benefits mainly due to the reinstatement of bonuses to employees in fiscal year 2021, which were suspended in fiscal year 2020 due to the COVID-19 pandemic, and an increase of $1.7 million this fiscal year compared to prior fiscal year due to the conclusion of a foreign indirect tax audit in fiscal year 2020 offset by a decrease in expense for allowance for credit losses of $1.6 million and a decrease in outside services and consulting of $1.2 million.

Income on equity method investment, net

Income (loss) on equity method investment was an income of $0.9 million as compared to a loss of $0.1 million during the year ended June 30, 2020.

Other expense, net

Other expense, net increased by $21.0 million for the year ended June 30, 2021, as compared to the year ended June 30, 2020. The increase was primarily due to the non-cash gain of $13.0 million related to the value of the Accuray systems contributed to the JV in exchange for 49% equity interest that was recorded in fiscal year 2020, an increase of $5.7 million due to loss on extinguishment of debt and a $4.3 million due to loss on the exchange of our 3.75% Convertible Notes due 2022 that was treated as an extinguishment of old notes. The impact of these items was offset by an increase of $0.4 million in net foreign currency exchange gain, a decrease of $1.2 million in interest expense and a $0.2 million payment received for building improvements to a facility that was vacated in 2020.

Provision for income taxes

The provision for income taxes was lower in fiscal 2021 as compared to fiscal 2020 due to lower foreign earnings in fiscal 2021. We also released income tax benefits in fiscal 2020 related to final tax assessments from the Swiss tax authorities for the fiscal period 2018 that otherwise would have reflected a much higher income tax expense for us in fiscal 2020.

Fiscal 2020 results compared to 2019 (in thousands, except percentages)

78

Net revenue

Product Net Revenue

Product net revenue decreased by $29.4 million, or 15%, as compared to the year ended June 30, 2019. The decrease was primarily due to a reduction in system sales of $35.7 million from lower unit volume offset by a $6.4 million increase in upgrades and other revenue as compared to the prior year.

Service Net Revenue

Service net revenue decreased by $6.5 million, or 3%, as compared to the year ended June 30, 2019. The decrease was primarily driven by a decrease of $4.7 million resulting from fewer upgrades purchased through our service agreements, a $2.7 million decrease of service contract revenue, a $0.5 million decrease in revenue from training, offset by $1.4 million increase in revenue from installations.

Net revenue by geographic region, based on the shipping location of our customer, is as follows (in thousands, except percentages):

Gross profit

The overall gross profit margin was 39% for the years ended June 30, 2020 and 2019. Product gross margin was 43% for the year ended June 30, 2020 as compared to 40% for the year ended June 30, 2019, driven by lower cost of revenue, primarily due to product sales mix. Service revenue gross margin was 36% for the year ended June 30, 2020 as compared to 37% for the year ended June 30, 2019, primarily due to a higher service parts consumption and lower service revenue during fiscal year 2020 as compared to fiscal year 2019.

Research and development expenses

Research and development expenses decreased by $6.7 million, or 12%, for the year ended June 30, 2020 as compared to the year ended June 30, 2019. The decrease was primarily due to a decrease of $3.4 million in compensation and benefits expenses due to lower headcount and related costs, a decrease of $2.9 million in overall operational cost due to changes in the timing of project spend, a decrease of $1.4 million due to a reduction in outsourcing expenses and consultants engaged by the Company in response to uncertainties created by the COVID-19 pandemic and a decrease of $0.3 million in travel expenses, offset by an increase of $1.2 million in research and development facilities expenses.

Selling and marketing expenses

Selling and marketing expenses decreased $8.7 million, or 16%, for the year ended June 30, 2020 as compared to the year ended June 30, 2019. The decrease was primarily due to a decrease of $4.7 million in compensation and employee benefits including a decrease in stock-based compensation driven by lower headcount and related costs, a decrease of $1.6 million in travel expenses due to the impact of the COVID-19 pandemic on travel, a decrease of $1.4 million in marketing expenses driven by postponement of tradeshows, a decrease of $0.7 million in facility cost due to consolidation of facilities and a decrease of $0.2 million driven by lower software service and maintenance expense.

79

General and administrative expenses

General and administrative expenses decreased by $9.4 million, or 19%, for the year ended June 30, 2020 as compared to the year ended June 30, 2019. The decrease was primarily due to a decrease of $2.6 million related to lower compensation and employee benefits costs, a decrease of $2.6 million due to lower outside service costs related to establishment of the JV as compared to the same period last fiscal year, a benefit of $1.7 million as a result of the conclusion of a foreign indirect tax audit, a decrease in expense for allowance for doubtful accounts of $1.9 million, and a decrease of $0.6 million due to lower facility and IT service costs.

Other expense, net

Other expense, net decreased by $8.1 million, or 54%, for the year ended June 30, 2020 as compared to the year ended June 30, 2019. The decrease was primarily due to a non-cash gain of $13.0 million related to the value of the Accuray systems contributed to the JV in exchange for 49% equity interest, offset by an increase of $2.9 million in net interest expense and an increase of $1.7 million in foreign exchange losses.

Provision for income taxes

The provision for income taxes was lower in fiscal 2020 as compared to fiscal 2019 due to lower foreign earnings in fiscal 2020. In both fiscal 2020 and 2019, we released tax benefits related to final tax assessments from the Swiss tax authorities for the period from fiscal 2018 and 2017, respectively which decreased our foreign taxes for such periods.

Share-Based Compensation Expense

In fiscal 2021, 2020 and 2019, we recorded share‑based compensation expense of $9.3 million, $8.2 million and $10.6 million, respectively, related to awards under our stock incentive plans. Share‑based compensation expense was recorded net of estimated forfeitures. As of June 30, 2021, we had approximately $16.6 million of unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options, shares under our Employee Stock Purchase Plan, or ESPP, stock options and restricted stock units, or RSUs, which we expect to recognize over a weighted average period from 0.5 to 2.57 years.

Liquidity and Capital Resources

At June 30, 2021, we had $116.4 million in cash and cash equivalents. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks included in Part I, Item 1A titled “Risk Factors.” Also refer to Note 10, Debt to the consolidated financial statements for discussion of the New Credit Facilities and the Notes as of June 30, 2021. Based on our cash and cash equivalents balance, available debt facilities, current business plan and revenue prospects, we believe that we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months. However, we continue to critically review our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic.

In May 2021, we issued $100.0 million aggregate principal amount of 3.75% Convertible Senior Notes due 2026 under an indenture between us and The Bank of New York Mellon Trust Company, N.A., as trustee. $97.1 million aggregate principal amount of the 3.75% Convertible Notes due 2026 were issued to certain holders of 3.75% Convertible Notes due 2022 in exchange for $82.1 million aggregate principal amount of 3.75% Convertible Notes due 2022 outstanding and $2.9 million aggregate principal amount were issued for cash. Concurrently, in May 2021, we entered into a senior secured credit agreement with Silicon Valley Bank, individually as a lender and agent, and the other lenders (the “New Credit Agreement”), which provides for a new five-year $80 million term loan facility and a $40 million revolving credit facility (the “New Revolving Credit Facility”). The initial borrowings under the New Credit Agreement, including $25 million under the New Revolving Credit Facility, were funded on May 14, 2021.

Our liquidity and cash flows has been and could continue to be materially impacted by the diversion of customer resources to the response to the COVID-19 pandemic as well as delays in payments from customers and could be further impacted by additional and prolonged delays in payments from customers, the potential of extended "shelter in place" and social distancing orders or advisories, facility closures, or other reasons related to the COVID-19 pandemic. As of June 30, 2021, there remain uncertainties as to how the COVID-19 pandemic is likely to materially

80

impact our liquidity in the future. As precautionary measures to increase our cash position and preserve financial flexibility in view of the ongoing uncertainty resulting from the COVID-19 pandemic, we (i) implemented temporary salary reductions for our Chief Executive Officer and each of our Senior Vice Presidents, which was effective June 1, 2020 through December 31, 2020, (ii) eliminated all Board and committee retainers for the period beginning July 1, 2020 through December 31, 2020, (iii) eliminated all awards under the Company Bonus Plan for the fiscal 2020 performance period, other than those that were contractually guaranteed, (iv) implemented a cost saving initiative designed to reduce operating costs through the elimination of approximately 3 percent of our global workforce, (v) amended the credit and security agreements related to our Prior Revolving Credit Facility and Prior Term Loan to modify certain financial covenant requirements and (vi) suspended the 401(k) match program for all employees from June 1, 2020 through December 31, 2020. As of January 1, 2021, our Chief Executive Officer and each of our Senior Vice Presidents’ salaries were restored to the base salary levels that were in effect for such officer as of October 2019, all as disclosed in the Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 1, 2020 (the “Proxy Statement”). In addition, as of January 1, 2021, the Board and Committee retainers for our Board were restored to the amounts in effect prior to their temporary elimination, as disclosed in the Proxy Statement. Finally, we also reinstated the employer 401(k) match program for all eligible employees as of January 1, 2021.

In addition, we are unable to predict with certainty the impact of the COVID-19 pandemic on our ability to maintain compliance with the debt covenants contained in the credit and security agreements related to our New Credit Facilities, including financial covenants regarding the fixed charge coverage ratio, minimum consolidated cash balance and minimum consolidated domestic cash balance tests. While we were in compliance with such covenants for the year ended June 30, 2021, failure to meet the covenant requirements in the future could cause us to be in default and the maturity of the related debt could be accelerated and become immediately payable. This may require us to obtain waivers or amendments to the credit and security agreement in order to maintain compliance and there can be no certainty that any such waiver or amendment will be available, or what the cost of such waiver or amendment, if obtained, would be. If we are unable to obtain necessary waivers or amendment and the debt under such credit facility is accelerated, we would be required to obtain replacement financing at prevailing market rates, which may not be favorable to us. There is no guarantee that we would be able to satisfy our obligations if any of our indebtedness is accelerated.

Additionally, the undistributed earnings of our foreign subsidiaries at June 30, 2021 are considered to be indefinitely reinvested and unavailable for distribution in the form of dividends or otherwise. Future repatriation of the Company’s foreign earnings are subject to income taxes. We anticipate that we have adequate liquidity and capital resources and would not need to repatriate earnings. As of June 30, 2021, we had approximately $63.3 million of cash and cash equivalents at our foreign subsidiaries. If such funds were repatriated, there could be additional foreign tax withholdings imposed depending on the country from which the funds were repatriated. Our foreign earnings are deemed to be indefinitely invested outside the U.S.

Cash Flows