ACCURAY INC 10-K

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 S 7 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: • 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 conducted with the CyberKnife platform; • 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 radiosurgery 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. 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: • 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. 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: • 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 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): Years Ended June 30, 2021 2020 2019 Gross orders $ 325,929 $ 377,295 $ 342,321 Net age-outs (122,132 ) (81,073 ) (95,463 ) Cancellations (15,119 ) (13,939 ) (25,012 ) Currency impacts and other 3,203 (1,746 ) (3,583 ) Net orders $ 191,881 $ 280,537 $ 218,263 Order backlog at the end of the period $ 616,399 $ 602,713 $ 495,627 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. • 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. 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. • The net age-outs for the year ended June 30, 2020 were $81.1 million. There were $20.5 million age-ins, which represent orders that previously aged-out but have been taken to revenue in the current period, compared to $95.5 million of age-outs and $12.0 million of age-ins for the year ended June 30, 2019. Age-ins offset the gross amount of age-outs in a particular period. • There were $13.9 million and $25.0 million in cancellations in the year ended June 30, 2020 and June 30, 2019, respectively. 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. Additionally, there were $4.1 million cancellations recorded in fiscal year 2020 related to cancellations that occurred in fiscal 2019. • Other adjustments and foreign currency impacts decreased net orders by $1.7 million and by $3.6 million for the year ended June 30, 2020 and June 30, 2019, respectively. 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) Years Ended June 30, 2021 2020 change (Dollars in thousands) Amount %(*) Amount %(*) $ % Products $ 176,647 45 % $ 167,302 44 % $ 9,345 6 % Services 219,642 55 % 215,626 56 % 4,016 2 % Net revenue (a) $ 396,289 100 % $ 382,928 100 % $ 13,361 3 % Gross profit $ 159,507 40 % $ 149,721 39 % $ 9,786 7 % Products gross profit 74,547 42 % 71,420 43 % 3,127 4 % Services gross profit 84,960 39 % 78,301 36 % 6,659 9 % Research and development expenses 52,729 13 % 49,784 13 % 2,945 6 % Selling and marketing expenses 42,820 11 % 47,254 12 % (4,434 ) (9 )% General and administrative expenses 41,723 11 % 40,144 10 % 1,579 4 % (Gain) loss on equity method investment (872 ) (0 )% 149 0 % (1,021 ) (685 )% Other expense, net 27,666 7 % 6,700 2 % 20,966 313 % Provision for income taxes 1,752 — % 1,863 — % (111 ) (6 )% Net income (loss) $ (6,311 ) (2 )% $ 3,827 1 % (10,138 ) (265 )% (*) 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. (a) Includes sales to the JV, an equity method investment of $24,393 and $19,054 for fiscal year ended June 30, 2021 and 2020, respectively. See Note 13. 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): Years Ended June 30, 2021 2020 Net revenue $ 396,289 $ 382,928 Americas 27 % 34 % Europe, Middle East, India and Africa 31 % 31 % Asia Pacific, excluding Japan and China 7 % 8 % Japan 16 % 19 % China 20 % 8 % 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) Years Ended June 30, 2020 2019 change Amount %(*) Amount %(*) $ % change Products $ 167,302 44 % $ 196,665 45 % $ (29,363 ) (15 )% Services 215,626 56 % 222,120 55 % (6,494 ) -3 % Net revenue $ 382,928 100 % $ 418,785 100 % $ (35,857 ) (9 )% Gross profit $ 149,721 39 % $ 162,651 40 % $ (12,930 ) (8 )% Products gross profit 71,420 43 % 79,954 44 % (8,534 ) -1 % Services gross profit 78,301 36 % 82,697 37 % (4,396 ) 2 % Research and development expenses 49,784 13 % 56,493 14 % (6,709 ) -12 % Selling and marketing expenses 47,254 12 % 55,998 15 % (8,744 ) -16 % General and administrative expenses 40,144 10 % 49,577 12 % (9,433 ) -19 % Loss on equity method investment 149 0 % — 15 % 149 — Other expense, net 6,700 2 % 14,927 5 % (8,227 ) -55 % Provision for income taxes 1,863 — % 2,086 — % (223 ) -11 % Net loss $ 3,827 1 % $ (16,430 ) (4 )% $ 20,257 (123 )% (*) 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. 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): Years Ended June 30, 2020 2019 Net revenue $ 382,928 $ 418,785 Americas 34 % 32 % Europe, Middle East, India and Africa 31 % 36 % Asia Pacific, excluding Japan and China 8 % 11 % Japan 19 % 17 % China 8 % 5 % 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 T he 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, w e 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 Years Ended June 30, 2021 2020 2019 Net cash provided by (used in) operating activities $ 38,512 $ (1,469 ) $ (29,641 ) Net cash used in investing activities (2,399 ) (3,728 ) (4,311 ) Net cash provided by (used in) financing activities (28,805 ) 26,696 28,473 Effect of exchange rate changes on cash, cash equivalents and restricted cash 982 234 124 Net increase (decrease) in cash, cash equivalents and restricted cash $ 8,290 $ 21,733 $ (5,355 ) 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. 81 Cash Flows From Operating Activities 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. Net cash used in operating activities was $29.6 million in fiscal 2019, resulting primarily from a net change in operating assets and liabilities of $44.6 million and non‑cash items of $31.5 million that was offset by a net loss of $16.4 million. • Non‑cash items consisted primarily of stock‑based compensation expense of $10.6 million, depreciation and amortization expense of $10.5 million, non‑cash interest expenses on debt of $4.9 million, provision for bad debt of $3.7 million, and write down of inventories of $2.3 million. • The net change in operating assets and liabilities was primarily due to a $46.2 million increase in accounts receivable due to the payment terms and timing of revenue transactions and cash collection, an increase of $14.2 million in inventories to support anticipated product shipments in future periods, an increase of $13.0 million in prepaid and other assets primarily due to incremental costs of obtaining contracts capitalized under ASC 606, and a decrease of $2.5 million in customer advances due to the timing and receipts of new deposits. This was partially offset by an increase of $10.7 million in accrued liabilities and an increase of $9.5 million in accounts payable due to timing of payments. 82 Cash Flows From Investing Activities 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. Net cash used in investing activities was $4.3 million in fiscal 2019, which primarily consisted of purchases of property and equipment. Cash Flows From Financing Activities 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. Net cash provided by financing activities during fiscal 2019 was $28.5 million, which was primarily due to $20.0 million of net debt proceeds related to a draw under our Prior Term Loan, a net $4.6 million increase in borrowings under our Prior Revolving Credit Facility, and $3.9 million in proceeds 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; • 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; and • The unpredictable impact of the COVID-19 pandemic on collections. 83 We believe that, based on our cash and cash equivalents balance, available debt facilities, current business plan and revenue prospects, we will have sufficient cash resources and anticipated cash flows to fund our operations for at least the next 12 months. If these sources of cash and cash equivalents are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities, enter into additional credit facilities or we may opportunistically seek to raise capital in debt of equity transactions. 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. Contractual Obligations and Commitments The following is a schedule summarizing our obligations to make future payments under contractual obligations as of June 30, 2021. Refer to Note 10, Debt in Notes to the Consolidated Financial Statements in Item 8, Part II, of this report on Form 10‑K (in thousands): Payments due by period Total Less than 1 year 1-3 years 3-5 years More than 5 years 3.75% Convertible Notes due 2022 and 2026, New Term Loan Facility, and New Revolving Credit Facility(1) $ 202,865 $ 4,000 $ 14,865 $ 184,000 $ — Interest on 3.75% Convertible Notes due 2022 and 2026, New Term Loan Facility and New Revolving Credit Facility(2) 33,929 7,424 14,097 12,408 — Operating leases 27,786 9,564 15,054 3,168 Total $ 264,580 $ 20,988 $ 44,016 $ 199,576 $ — (1) Any conversion, redemption or purchase of our outstanding convertible notes due 2022 and 2026 would impact our cash payments noted in this table. Please see Note 10, Deb t, to the consolidated financial statements for further information. Amounts presented are for principal only. (2) Interest on the New Term Loan Facility and New Revolving Credit Facility are accrued at 3.5% per annum, respectively, which may vary in subsequent periods based upon LIBOR and consolidated senior net leverage ratio. 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, and hence, have not been included in the table above. Off Balance Sheet Arrangements 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, 2021 exchange rate was approximately $54.2 million. We did not have any off balance sheet arrangements for the years ended June 30, 2020, or 2019. Critical Accounting Policies and 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 84 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. 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, business combinations and assessment of recoverability of goodwill and intangible assets, valuation of inventories, share‑based compensation expense, convertible notes, income taxes, allowance for doubtful accounts and loss contingencies. C oncentration 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, 2021, there was one customer that represented 10% or more of total net revenue and for the years ended June 30, 2020 and 2019, there were no customers that represented 10% or more of total net revenue. We had two customers as of June 30, 2021 and one customer as of June 30, 2020, 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, 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 control is transferred at which point 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 credit-worthiness of the customer. We generally do not request collateral from our customers. We frequently enter into sales arrangements that contain multiple elements or deliverables. For sale arrangements that contain multiple elements, we account for individual products and services based on relative stand-alone selling price (“SSP”). The SSP is determined based on observable prices at which we separately sell the products and services. If an 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 85 The majority of product revenue is generated from sales of CyberKnife and TomoTherapy platforms, including the Radixact System. 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. We recognize revenue as the performance obligations are satisfied by transferring control of the product or service to our customer. 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 contracts (warranty period services and post warranty services), installation services, training and professional services. Service revenue is recognized either over time ratably over the contractual period as control and benefit transfer to the customer or at a point in time 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 the upgrade revenue is recognized. Assessment of Recoverability of Goodwill and Intangible Assets 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 and other intangible assets, 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. We make judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Recoverability of purchased intangible assets with finite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. Impairment, if any, is measured as the amount by which the carrying value exceeds the fair value of the impaired asset. We review indefinite‑lived intangible assets for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts. 86 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. Share‑Based Compensation Expense We use the Black Scholes option valuation model to estimate the fair value of stock options and ESPP shares. This valuation model requires the input of highly subjective assumptions, the most significant of which is our estimates of expected volatility and the expected term of the award. Our expected volatility is derived from the historical volatilities of our common stock. We estimate the expected term of stock option by taking the average of the vesting term and the contractual term of the option, as illustrated by the simplified method. We use the Monte Carlo simulation model to estimate the grant date fair value of Market Stock Units, or MSUs. With respect to Performance Stock Units that are based on our corporate financial performance targets, or PSUs, the number of PSUs that will ultimately be awarded is contingent on our actual level of achievement compared to the corporate financial target performance targets. The assumptions used in calculating the fair value of share based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share based compensation expense could be materially different in the future. We recognize compensation cost for only those shares expected to vest over the requisite service period of the award. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on recent forfeiture activity and expected future employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share‑based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. 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. Leases We are the lessee in a lease contract when we obtain the right to use the asset. Operating leases are included in the line items right-of-use asset, lease obligation, current, and lease obligation, long-term in the consolidated balance sheet. Right-of-use asset represents our right to use an underlying asset for the lease term and lease obligations represent our obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the consolidated balance sheet and are expensed on a straight-line basis over the lease term in our consolidated statement of income. We determine the lease term by agreement with lessor. As our lease does not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. 87 Refer to Note 2. Recent Accounting Pronouncements and Note 5 . Leases to our consolidated financial statements included in this Annual Report on Form 10-K for further information on our adoption of ASC 842 . Income Taxes We determine our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in our income tax returns filed during the subsequent year. We record adjustments based on filed returns when we have identified and finalized them, which is generally in the fourth quarter of the subsequent year for U.S. federal and state provisions. We have placed a full valuation allowance on all net U.S. deferred tax assets because realization of these tax benefits through future taxable income cannot be reasonably assured. We intend to maintain the valuation allowance until sufficient positive evidence exists to support the reversal of the valuation allowance. Any decision to reverse part or all of the valuation allowance would be based on our estimate of future profitability. If our estimate were to be wrong, we could be required to charge potentially significant amounts to income tax expense to establish a new valuation allowance. Our effective tax rate does not include the impact of undistributed foreign earnings for which we have not provided income taxes related to foreign tax withholdings because we plan to reinvest such earnings indefinitely outside the United States. We have estimated whether there is a need for foreign earnings remittance amounts based on projected cash flow needs as well as the working capital and long‑term investment requirements of our foreign subsidiaries and our domestic operations. Material changes in our estimates of cash, working capital and long‑term investment requirements in the various jurisdictions in which we do business could impact our effective tax rate. We are subject to income taxes in the United States and certain foreign countries, and we are subject to corporate income tax audits in some of these jurisdictions. We believe that our tax return positions are fully supported, but tax authorities are likely to challenge certain positions, which may not be fully sustained. However, our income tax expense includes amounts intended to satisfy income tax assessments that result from these challenges. Determining the income tax expense for these potential assessments and recording the related assets and liabilities requires management judgments and estimates. We evaluate our uncertain tax positions in accordance with the guidance for accounting for uncertainty in income taxes. We believe that our reserve for uncertain tax positions is adequate. We review our reserves quarterly, and we may adjust such reserves because of proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations or new case law, previously unavailable information obtained during the course of an examination, negotiations between tax authorities of different countries concerning our transfer prices, or the expiration of statutes of limitations. 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. Loss Contingencies As discussed in Note 9. Commitments and Contingencies , to the consolidated financial statements, we are involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. We record a provision for a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. We provide disclosure if it is reasonably possible that a loss has been incurred and a range of loss or possible loss can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information. Litigation is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, we could incur significant charges related to legal matters which could have a material impact on our results of operations, financial position and cash flows. 88 Item 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions. Foreign Currency Exchange Rate Risk A portion of our net sales are denominated in foreign currencies, most notably the Euro and the Japanese Yen. Future fluctuations in the value of the U.S. Dollar may affect the price competitiveness of our products outside the United States. For direct sales outside the United States, we sell in both U.S. Dollars and local currencies, which could expose us to additional foreign currency risks, including changes in currency exchange rates. Our operating expenses in countries outside the United States, are payable in foreign currencies and therefore expose us to currency risk. To the extent that management can predict the timing of payments under sales contracts or for operating expenses that are denominated in foreign currencies, we may engage in hedging transactions to mitigate such risks in the future. We expect the changes in the fair value of the net foreign currency assets arising from fluctuations in foreign currency exchange rates to be materially offset by the changes in the fair value of the forward contracts. As of June 30, 2021, we had open currency forward contracts to purchase or sell foreign currencies with stated, or notional value of approximately $54.2 million. The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a foreign exchange policy to govern our forward contracts. These foreign currency forward contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other expenses, net. We have not entered into any other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve management judgment. Interest Rate Risk We maintain an investment portfolio of various holdings, types and maturities. These securities are generally classified as available for sale and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income. At any time, a sharp rise or decline in interest rates could have a material adverse impact on the fair value of our investment portfolio. Likewise, increases and decreases in interest rates could have had a material impact on interest earnings for our portfolio. We do not currently carry investments that are sensitive to interest rate risk. Our debt obligations consist of a variety of financial instruments that expose us to interest rate risk, including, but not limited to the New Credit Facilities and Notes. The interest rates on the Notes are fixed and the interest rate on the New Credit Facilities are at variable rates, which are tied to a “prime rate” and LIBOR. As of June 30, 2021, borrowings under the New Term Loan Facility totaled $78.7 million net of issuance cost with an annual interest rate of 3.0% plus 90-day LIBOR, and borrowings under the New Revolving Credit Facility totaled $20.0 million with an annual interest rate of 3.0% plus 90-day LIBOR. If the amount outstanding under the New Credit Facilities remained at this level for the next 12 months and interest rates increased or decreased by 50 basis point change, our annual interest expense would increase or decrease, respectively, approximately $0.5 million. Refer to Note 10, Debt to our consolidated financial statements included in this Annual Report on Form 10-K for a discussion regarding our debt obligations. 89 Equity Price Risk On August 7, 2017, we issued approximately $85.0 million aggregate principal amount of 3.75% Convertible Notes due 2022. Upon conversion, we can settle the obligation by issuing our common stock, cash or a combination thereof at an initial conversion rate equal to 174.8252 shares of common stock per $1,000 principal amount of the 3.75% Convertible Notes due 2022, which is equivalent to a conversion price of approximately $5.72 per share of common stock, subject to adjustment. There is no equity price risk if the share price of our common stock is below $5.72 upon conversion of the 3.75% Convertible Notes due 2022. As of June 30, 2021 the remaining outstanding principal amount of 3.75% Convertible Notes due 2022 is $2.9 million for every $1 that the share price of our common stock exceeds $5.72, we expect to issue an additional $0.5 million in cash or shares of our common stock, or a combination thereof, if all of the 3.75% Convertible Notes due 2022 are converted. On May 13, 2021, we issued approximately $100.0 million aggregate principal amount of 3.75% Convertible Notes due 2026. Upon conversion, we can settle the obligation by issuing our common stock, cash or a combination thereof at an initial conversion rate equal to 170.5611 shares of common stock per $1,000 principal amount of the 3.75% Convertible Notes due 2026, which is equivalent to a conversion price of approximately $5.86 per share of common stock, subject to adjustment. There is no equity price risk if the share price of our common stock is below $5.86 upon conversion of the 3.75% Convertible Notes due 2026. For every $1 that the share price of our common stock exceeds $5.86, we expect to issue an additional $17.1 million in cash or shares of our common stock, or a combination thereof, if all of the 3.75% Convertible Notes due 2026 are converted. 90