ACCURAY INC (ARAY) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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
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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”
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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:
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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;
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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);
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The specific end-customer site has been identified by the customer in the written contract or written amendment; and
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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:
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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;
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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
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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.
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A summary of gross orders, net orders, and order backlog is as follows (in thousands):
| Years Ended June 30, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | |||||||||
| Gross orders | $ | 311,094 | $ | 332,268 | $ | 325,929 | |||||
| Age-ins | 39,435 | 34,884 | 26,647 | ||||||||
| Age-outs | (152,573 | ) | (183,753 | ) | (148,779 | ) | |||||
| Cancellations | (6,670 | ) | (11,348 | ) | (15,119 | ) | |||||
| Currency impacts and other | (8,354 | ) | (4,735 | ) | 3,203 | ||||||
| Net orders | $ | 182,932 | $ | 167,316 | $ | 191,881 | |||||
| Order backlog at the end of the period | $ | 510,641 | $ | 563,684 | $ | 616,399 |
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.
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Results of Operations
Fiscal 2023 results compared to fiscal 2022
Net revenue
Net revenue by sales classification is as follows:
| Years Ended June 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | |||||||||||||
| Products (a) | $ | 233,192 | 9 | % | $ | 214,715 | 22 | % | $ | 176,647 | ||||||||
| Services (b) | 214,413 | (0 | )% | 215,194 | (2 | )% | 219,642 | |||||||||||
| Net revenue | $ | 447,605 | 4 | % | $ | 429,909 | 8 | % | $ | 396,289 | ||||||||
| Products revenue as a percentage of net revenue | 52 | % | 50 | % | 45 | % | ||||||||||||
| Service revenue as a percentage of net revenue | 48 | % | 50 | % | 55 | % |
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:
| Years Ended June 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | |||||||||||||
| Americas | $ | 122,335 | (3 | )% | $ | 126,005 | 19 | % | $ | 105,878 | ||||||||
| EIMEA | 155,879 | 16 | % | 134,640 | 11 | % | 121,568 | |||||||||||
| China | 75,762 | (13 | )% | 86,935 | 9 | % | 79,782 | |||||||||||
| Japan | 61,962 | 16 | % | 53,376 | (15 | )% | 62,636 | |||||||||||
| Asia Pacific, excluding China | 31,667 | 9 | % | 28,953 | 10 | % | 26,425 | |||||||||||
| Net revenue | $ | 447,605 | 4 | % | $ | 429,909 | 8 | % | $ | 396,289 |
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:
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| Years Ended June 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | |||||||||||||
| Products gross profit | $ | 79,565 | (9 | )% | $ | 87,428 | 17 | % | $ | 74,547 | ||||||||
| Services gross profit | 74,395 | 3 | % | 72,527 | (15 | )% | 84,960 | |||||||||||
| Gross profit | $ | 153,960 | (4 | )% | $ | 159,955 | 0 | % | $ | 159,507 | ||||||||
| Total gross profit as a percentage of net revenue | 34.4 | % | 37.2 | % | 40.3 | % |
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
| Years Ended June 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | |||||||||||||
| Research and development | $ | 57,129 | (1 | )% | $ | 57,752 | 10 | % | $ | 52,729 | ||||||||
| Selling and marketing | 46,178 | (7 | )% | 49,664 | 16 | % | 42,820 | |||||||||||
| General and administrative | 48,271 | 9 | % | 44,391 | 6 | % | 41,723 | |||||||||||
| Total operating expenses | $ | 151,578 | $ | 151,807 | $ | 137,272 | ||||||||||||
| Research and development as a percentage of net revenue | 13 | % | 13 | % | 13 | % | ||||||||||||
| Selling and marketing as a percentage of net revenue | 10 | % | 12 | % | 11 | % | ||||||||||||
| General and administrative as a percentage of net revenue | 11 | % | 10 | % | 11 | % | ||||||||||||
| Total operating expenses as a percentage of net revenue | 34 | % | 35 | % | 35 | % |
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
| Years Ended June 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | |||||||||||||
| Income on equity method investment | $ | 2,572 | 967 | % | $ | 241 | (72 | )% | $ | 872 |
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.
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Other expense, net
| Years Ended June 30, | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | ||||||||||||||
| Interest expense | $ | (10,632 | ) | 31 | % | $ | (8,129 | ) | (52 | )% | $ | (16,893 | ) | ||||||
| Foreign currency transaction loss | (878 | ) | (66 | )% | (2,618 | ) | 34 | % | (1,953 | ) | |||||||||
| Loss on debt extinguishment | - | 0 | % | - | (100 | )% | (9,948 | ) | |||||||||||
| Other | (232 | ) | (165 | )% | 356 | (68 | )% | 1,128 | |||||||||||
| Total other expense, net | $ | (11,742 | ) | $ | (10,391 | ) | $ | (27,666 | ) |
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
| Years Ended June 30, | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2023 | Percent Change | 2022 | Percent Change | 2021 | |||||||||||||
| Provision for income taxes | $ | 2,492 | (26 | )% | $ | 3,345 | 91 | % | $ | 1,752 |
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
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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
| Years Ended June 30, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||
| Net cash provided by (used in) operating activities | $ | 15,539 | $ | (2,400 | ) | $ | 38,512 | |||||
| Net cash used in investing activities | (12,681 | ) | (4,717 | ) | (2,399 | ) | ||||||
| Net cash used in financing activities | (2,112 | ) | (15,369 | ) | (28,805 | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 302 | (5,561 | ) | 982 | ||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 1,048 | $ | (28,047 | ) | $ | 8,290 |
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.
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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.
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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:
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Revenue generated by sales of our products and service plans;
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Our ability to generate cash flows from operations;
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Costs associated with our sales and marketing initiatives and manufacturing activities;
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Facilities, equipment and IT systems required to support current and future operations;
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Rate of progress and cost of our research and development activities;
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Costs of obtaining and maintaining FDA and other regulatory clearances of our products;
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Effects of competing technological and market developments;
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Number and timing of acquisitions and other strategic transactions;
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Servicing and maturity of our current future indebtedness, including interest rates;
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The impact of inflation on our expenses; and
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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
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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.
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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.