ViewRay (VRAYQ) 10-Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to    

Commission File Number: 001-37725

ViewRay, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	42-1777485
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2 Thermo Fisher Way Oakwood Village, OH	44146
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (440) 703-3210

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒ No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.     Yes  ☒    No  ☐

As of April 26, 2019, the registrant had 96,952,728 shares of common stock, $0.01 par value per share, outstanding.

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01	VRAY	The Nasdaq Global Market

VIEWRAY, INC.

FORM 10-Q

TABLE OF CONTENTS

			Page
	PART I – FINANCIAL INFORMATION
	Cautionary Note Regarding Forward-Looking Statements		3
Item 1.	Unaudited Condensed Consolidated Financial Statements		4
	Condensed Consolidated Balance Sheets		4
	Condensed Consolidated Statements of Operations and Comprehensive Loss		5
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity		6
	Condensed Consolidated Statements of Cash Flows		7
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
	Signatures	31

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Report, contains forward-looking statements, including, without limitation, in the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “will”, “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to the development of products, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation:

• market acceptance of magnetic resonance imaging (“MRI”) guided radiation therapy;

• the benefits of MR Image-Guided radiation therapy;

• our ability to successfully sell and market MRIdian® in our existing and expanded geographies;

• the performance of MRIdian in clinical settings;

• competition from existing technologies or products or new technologies and products that may emerge;

• the pricing and reimbursement of MR Image-Guided radiation therapy;

• the implementation of our business model and strategic plans for our business and MRIdian;

• the scope of protection we are able to establish and maintain for intellectual property rights covering MRIdian;

• our ability to obtain regulatory approval in targeted markets for MRIdian;

• our ability to procure materials and components in connection with the manufacture and installation of MRIdian;

• estimates of our future revenue, expenses, capital requirements and our need for additional financing;

• our financial performance;

• our expectations related to the MRIdian linear accelerator technology, or MRIdian Linac;

• developments relating to our competitors and the healthcare industry; and

• other risks and uncertainties, including those listed under the section titled “Risk Factors.”

Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A, titled “Risk Factors” and discussed elsewhere in this Report, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise, except as required by law.

This Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain devices, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

3

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

VIEWRAY, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	145,797		$	167,432
Accounts receivable		27,432			36,867
Inventory		65,140			49,462
Deposits on purchased inventory		7,642			8,142
Deferred cost of revenue		4,342			9,736
Prepaid expenses and other current assets		9,060			6,045
Total current assets		259,413			277,684
Property and equipment, net		15,279			13,958
Restricted cash		1,382			1,933
Right-of-use assets		12,055			—
Other assets		1,496			1,395
TOTAL ASSETS	$	289,625		$	294,970
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,891		$	10,207
Accrued liabilities		16,207			9,983
Customer deposits		14,905			19,968
Operating lease liability, current		1,284			—
Deferred revenue, current		10,287			13,731
Total current liabilities		60,574			53,889
Deferred revenue, net of current portion		5,507			5,744
Long-term debt		55,402			55,364
Warrant liabilities		14,872			11,844
Operating lease liability, noncurrent		11,491			—
Other long-term liabilities		303			820
TOTAL LIABILITIES		148,149			127,661
Commitments and contingencies (Note 6)
Stockholders’ equity:
Convertible preferred stock, par value of $0.01 per share; 10,000,000 shares authorized    at March 31, 2019 and December 31, 2018; no shares issued and outstanding    at March 31, 2019 and December 31, 2018		—			—
Common stock, par value of $0.01 per share; 300,000,000 shares authorized at    March 31, 2019 and December 31, 2018; 96,933,098 and 96,332,023 shares    issued and outstanding at March 31, 2019 and December 31, 2018		959			952
Additional paid-in capital		572,855			565,334
Accumulated deficit		(432,338	)		(398,977	)
TOTAL STOCKHOLDERS’ EQUITY		141,476			167,309
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	289,625		$	294,970

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

4

VIEWRAY, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Revenue:
Product	$	18,874		$	25,379
Service		1,291			692
Distribution rights		119			119
Total revenue		20,284			26,190
Cost of revenue:
Product		22,033			19,711
Service		3,615			909
Total cost of revenue		25,648			20,620
Gross margin		(5,364	)		5,570
Operating expenses:
Research and development		5,031			3,770
Selling and marketing		4,885			3,246
General and administrative		15,109			9,846
Total operating expenses		25,025			16,862
Loss from operations		(30,389	)		(11,292	)
Interest income		220			2
Interest expense		(759	)		(1,866	)
Other (expense) income, net		(2,433	)		8,342
Loss before provision for income taxes	$	(33,361	)	$	(4,814	)
Provision for income taxes		—			—
Net loss and comprehensive loss	$	(33,361	)	$	(4,814	)
Amortization of beneficial conversion feature related to Series A convertible preferred stock	$	—		$	(2,728	)
Net loss attributable to common stockholders, basic and diluted	$	(33,361	)	$	(7,542	)
Net loss per share, basic and diluted	$	(0.34	)	$	(0.11	)
Weighted-average common shares used to compute net loss per    share attributable to common stockholders, basic and diluted		96,741,309			68,943,918

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

5

VIEWRAY, INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(In thousands, except share and per share data)

(Unaudited)

	Convertible Preferred Stock						Common Stock
	Shares		Amount		Additional Paid-in Capital		Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2018		—	$	—	$	—		96,332,023	$	952	$	565,334	$	(398,977	)	$	167,309
Issuance of common stock from option exercises		—		—		—		588,120		7		2,877		—			2,884
Stock-based compensation		—		—		—		—		—		4,552		—			4,552
Issuance of common stock from warrant exercises		—		—		—		12,955		—		—		—			—
Reclassification of warrant liability to additional paid-in capital upon warrant exercises		—		—		—		—		—		92		—			92
Net loss		—		—		—		—		—		—		(33,361	)		(33,361	)
Balance at March 31, 2019		—	$	—	$	—		96,933,098	$	959	$	572,855	$	(432,338	)	$	141,476
Balance at December 31, 2017		—	$	—	$	—		67,653,974	$	666	$	321,174	$	(319,853	)	$	1,987
Issuance of common stock from option exercises		—		—		—		265,647		3		375		—			378
Issuance of common stock from releases of restricted stock units		—		—		—		12,468		—		—		—			—
Stock-based compensation		—		—		—		—		—		1,190		—			1,190
Issuance of common stock upon direct registered offering (net of offering cost of $177)		—		—		—		4,090,000		41		30,052		—			30,093
Issuance of preferred Series A stock upon direct registered offering		3,000,581		30		22,177		—		—		2,728		(2,728	)		22,207
Issuance of common stock warrants in connection with direct registered offering		—		—		—		—		—		6,623		—			6,623
Net loss		—		—		—		—		—		—		(4,814	)		(4,814	)
Balance at March 31, 2018		3,000,581	$	30	$	22,177		72,022,089	$	710	$	362,142	$	(327,395	)	$	57,664

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

VIEWRAY, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(33,361	)	$	(4,814	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		946		658
Stock-based compensation		4,552			1,190
Accretion on asset retirement obligation		7			10
Change in fair value of warrant liabilities		3,120			(8,182	)
Amortization of debt discount and interest accrual		141			870
Product upgrade reserve		5,601			—
Changes in operating assets and liabilities:
Accounts receivable		9,435			(5,845	)
Inventory		(15,795	)		(12,021	)
Deposits on purchased inventory		500			(2,958	)
Deferred cost of revenue		4,628			9,126
Prepaid expenses and other assets		(3,009	)		282
Accounts payable		7,048			2,081
Accrued expenses and other long-term liabilities		1,278			725
Customer deposits and deferred revenue		(8,744	)		(18,576	)
Net cash used in operating activities		(23,653	)		(37,454	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,249	)		(497	)
Net cash used in investing activities		(1,249	)		(497	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from direct registered offering, gross		—			59,100
Payment of debt issuance cost		(168	)		—
Proceeds from the exercise of stock options		2,884			378
Net cash provided by financing activities		2,716			59,478
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(22,186	)		21,527
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — BEGINNING OF PERIOD		169,365			58,532
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — END OF PERIOD	$	147,179		$	80,059
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	750		$	996
Cash paid for taxes	$	7		$	-
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fair value of common stock warrants reclassified from liability to additional paid-in capital upon exercise	$	92		$	—
Right-of-use assets obtained in exchange for new operating lease liabilities	$	492		$	—
Transfer of property and equipment from inventory	$	246		$	1,415
Purchase of property and equipment in accounts payable and accrued liabilities	$	615		$	228
Offering costs included in accounts payable and accrued expenses	$	—		$	177

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

VIEWRAY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.Background and Organization

ViewRay, Inc., or ViewRay or the Company, and its wholly-owned subsidiary ViewRay Technologies, Inc., designs, manufactures and markets MRIdian, an MR Image-Guided radiation therapy system to simultaneously image and treat cancer patients.

Since inception, ViewRay Technologies, Inc. has devoted substantially all of its efforts towards research and development, initial selling and marketing activities, raising capital and the manufacturing, shipment and installation of MRIdian systems. In May 2012, ViewRay Technologies, Inc. was granted clearance from the U.S. Food and Drug Administration, or FDA, to sell MRIdian with Cobalt-60. In November 2013, ViewRay Technologies, Inc. received its first clinical acceptance of a MRIdian with Cobalt-60 at a customer site, and the first patient was treated with that system in January 2014. ViewRay Technologies, Inc. has had the right to affix the CE mark to MRIdian with Cobalt-60 in the European Economic Area since November 2014. In September 2016, the Company received the rights to affix the CE mark to MRIdian Linac, and in February 2017, the Company received 510(k) clearance from the FDA to market MRIdian Linac.

The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern. The Company’s principal sources of liquidity are cash flows from public and private offerings and available borrowings under its term loan agreement, as well as cash receipts from its sales of MRIdian systems. These have historically been sufficient to meet working capital needs, capital expenditures, and debt service obligations. During the three months ended March 31, 2019, the Company incurred a net loss of $33.4 million and used cash in operating activities of $23.7 million. The Company believes that its existing cash balance of $145.8 million as of March 31, 2019, together with anticipated cash proceeds from sales of MRIdian systems will be sufficient to provide liquidity to fund its operations for at least the next 12 months.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC. The condensed consolidated financial statements include the accounts of ViewRay, Inc. and its wholly-owned subsidiary, ViewRay Technologies, Inc. All inter-company accounts and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future period. These unaudited condensed consolidated financial statements and their notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Effective January 1, 2019, the Company adopted the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 842, or Topic 842, Leases, by using a modified retrospective transition approach. The adoption of Topic 842 had no impact on the Company’s prior period financial statements. Refer to Note 6, Commitments and Contingencies for further information and related disclosures.

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on March 15, 2019, and have not changed significantly since that filing, except for the January 1, 2019 adoption of the new accounting guidance Topic 842, Leases. Refer to the Recently Adopted Accounting Pronouncements below and to Note 6, Commitments and Contingencies for further information and related disclosures.

8

Recent Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update, or ASU, No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, to modify the disclosure requirements on fair value measurements in Topic 820. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, and interim periods therein. The Company is allowed to early adopt either the entire standard or only the provisions that eliminate or modify the requirements of Topic 820. The Company is evaluating the impact of this update on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU, No. 2016-02, Leases and issued subsequent amendments to the initial guidance in September 2017 within ASU 2017-13, in January 2018 within ASU 2018-01, in July 2018 within ASU 2018-10 and ASU 2018-11, and in March 2019 within ASU 2019-01 (collectively, Topic 842). Topic 842 supersedes Topic 840, Leases, and requires lessees to recognize on their balance sheets all leases, with the exception of short-term leases, as a right-of-use asset and a corresponding lease liability measured at the present value of the lease payments. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard requires expanded disclosures regarding leasing arrangements. Effective January 1, 2019, the Company adopted Topic 842 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. There was no cumulative-effect adjustment recorded to retained deficit upon adoption.

Topic 842 provides several optional practical expedients in transition. The Company elected to use the package of practical expedients permitted under the transition guidance, which allows the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs for any leases that existed prior to January 1, 2019. The Company did not elect to use the other practical expedients provided.

Upon adoption, the Company recognized the right-of-use assets and operating lease liabilities totaling approximately $11.9 million and $12.6 million, respectively, to reflect the present value of remaining lease payments under existing lease arrangements with no impact to the opening balance of retained deficit as a result of adoption. The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the leased assets.

In determining the present value of lease payments, the Company uses the rate implicit in the lease or when such rate is not readily available, we utilize our incremental borrowing rate based on the information available at the lease commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. In determining the expected lease term, the Company may include options to extend or terminate the lease when it is reasonably certain that it will exercise any such option. For more information on the impact of adoption and the disclosures required by the new standard, refer to Note 6, Commitments and Contingencies.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements toNonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 on January 1, 2019, and the adoption did not have a material impact on its condensed consolidated financial statements and related disclosures.

3. Balance Sheet Components

Property and Equipment, Net

Property and equipment consisted of the following (in thousands): 

	March 31, 2019			December 31, 2018
Prototype	$	12,247		$	12,425
Machinery and equipment		13,871			12,654
Leasehold improvements		4,621			4,600
Furniture and fixtures		665			636
Software		1,296			1,250
Construction in progress		1,216			148
Property and equipment, gross		33,916			31,713
Less: accumulated depreciation and amortization		(18,637	)		(17,755	)
Property and equipment, net	$	15,279		$	13,958

9

Depreciation and amortization expense related to property and equipment were $0.9 million and $0.7 million during the three months ended March 31, 2019 and 2018, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Accrued payroll and related benefits	$	5,828	$	5,047
Accrued accounts payable		3,736		3,626
Payroll withholding tax, sales and other tax payable		439		782
Accrued legal, accounting and professional fees		721		360
Product upgrade reserve		4,964		—
Other		519		168
Total accrued liabilities	$	16,207	$	9,983

Deferred Revenue

Deferred revenue consisted of the following (in thousands):

	March 31, 2019			December 31, 2018
Deferred revenue:
Product	$	5,424		$	9,623
Service		7,618			6,981
Distribution rights		2,752			2,871
Total deferred revenue		15,794			19,475
Less: current portion of deferred revenue		(10,287	)		(13,731	)
Noncurrent portion of deferred revenue	$	5,507		$	5,744

Other Long-Term Liabilities

	March 31, 2019		December 31, 2018
Accrued interest, noncurrent portion	$	104	$	—
Deferred rent, noncurrent portion		—		628
Other		199		192
Total other-long term liabilities	$	303	$	820

4. Fair Value of Financial Instruments

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

10

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at March 31, 2019 and December 31, 2018. Level 3 liabilities that are measured on a recurring basis relate to the 2017 and 2016 Placement Warrants, as described in Note 9. Placement warrant liabilities are valued using the Black-Scholes option-pricing model. Generally, increases (decreases) in the fair value of the underlying stock, volatility and estimated term would result in a directionally similar impact to the fair value of the warrants (see Note 9).

The gains and losses from re-measurement of Level 3 financial liabilities are recorded as part of other (expense) income, net in the condensed consolidated statements of operations and comprehensive loss. During the three months ended March 31, 2019 and 2018, the Company recorded a loss of $3.0 million and a gain of $8.2 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants. There were no transfers between Level 1, Level 2 and Level 3 in any periods presented.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy (in thousands): 

	At March 31, 2019
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	—	$	—	$	8,955	$	8,955
2016 Placement Warrants Liability		—		—		5,917		5,917
Total	$	—	$	—	$	14,872	$	14,872

	At December 31, 2018
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	—	$	—	$	7,115	$	7,115
2016 Placement Warrants Liability		—		—		4,729		4,729
Total	$	—	$	—	$	11,844	$	11,844

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 financial liabilities (in thousands):

	Three Months Ended March 31,
	2019			2018
Fair value, beginning of period	$	11,844		$	22,420
Change in fair value of Level 3 financial liabilities		3,120			(8,182	)
Fair value of 2016 Placement Warrants at exercise		(66	)		—
Fair value of 2017 Placement Warrants at exercise		(26	)		—
Fair value, end of period	$	14,872		$	14,238

5. Debt

SVB Term Loan

In December 2018, the Company entered into a term loan agreement, or the SVB Term Loan, with Silicon Valley Bank, for a principal amount of $56.0 million. The SVB Term Loan has a maturity date of December 1, 2023 and bears interest at a rate of 6.30% per annum to be paid monthly over the term of the loan. Beginning on December 1, 2020 (or June 1, 2021, if the Company achieves a trailing twelve-month revenue of at least a specified amount and elects to apply such later date), the Company will make thirty-six equal monthly payments of principal (or thirty equal payments, if the Company so elects). In addition, upon repayment of the SVB Term Loan in full, the Company will make a final payment equal to 3.15% of the original aggregate principal amount of the SVB Term Loan.

The Company used the proceeds of the SVB Term Loan and cash on hand to repay in full its outstanding obligations under its then outstanding term loan, or the CRG Term Loan and to pay fees and expenses related thereto. The Company accounted for the termination of the CRG Term Loan as a debt extinguishment and recorded a debt extinguishment loss of $2.4 million from the

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difference between the net carrying amount of debt and the amount paid. The debt extinguishment loss includes $0.3 million in write-off of unamortized debt discount and debt issuance costs associated with the CRG Term Loan.

The Company received net proceeds from the SVB Term Loan of $55.4 million after related legal and consulting fees totaling $0.6 million. Such fees are accounted for as debt discount and issuance costs and presented as a direct deduction from the carrying amount of debt on the Company’s consolidated balance sheets. Debt discount, issuance costs and the final payment are amortized or accreted as interest expense over the term of the loan using the effective interest method.

The SVB Term Loan is secured by substantially all assets of the Company, except that the collateral does not include any intellectual property held by the Company, provided, however, the collateral shall include all accounts and proceeds of such intellectual property.

The SVB Term Loan contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions and transactions with affiliates. The SVB Term Loan also contains financial covenants that require the Company to maintain a minimum cash balance in accounts maintained at Silicon Valley Bank or one of its affiliates or else comply with a liquidity ratio and/or a minimum revenue target.

The SVB Term Loan includes standard events of default, including, among other things, subject in certain cases to customary grace periods, thresholds and notice requirements, the Company’s failure to fulfill its obligations under the SVB Term Loan or the occurrence of a material adverse change in the Company's business, operations, or condition (financial or otherwise). In the event of default by the Company under the SVB Term Loan, Silicon Valley Bank would be entitled to exercise its remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the SVB Loan, which could harm the Company's financial condition.

The Company’s scheduled future payments on the SVB Term Loan at March 31, 2019 are as follows (in thousands):

Year Ended December 31,
The remainder of 2019	$	-
2020		1,555
2021		18,667
2022		18,667
2023		17,111
Total future principal payments		56,000
Less: unamortized debt discount		(598	)
Carrying value of long-term debt		55,402
Less: current portion		—
Long-term portion	$	55,402

6. Commitments and Contingencies

Operating Leases

The Company leases office space in Oakwood Village, Ohio and Mountain View, California under noncancelable operating lease agreements. The Company leases and occupies approximately 19,800 square feet of office space in Oakwood Village, Ohio, which expires in October 2019. In April 2019, the Company entered into an amendment to extend the term of the lease agreement through October 2021.

In June 2014, the Company entered into an office lease agreement to lease approximately 25,500 square feet of office space located in Mountain View, California, which expires in November 2019. In June 2018, the Company entered into an amendment to extend the term of the lease agreement through July 2025.

In April 2018, the Company entered into a lease agreement to lease approximately 24,600 square feet of additional office space located in Mountain View, California. The lease commenced in December 2018 and will expire in December 2025. The Company has the option to extend the term of the lease for a period of up to five years.

In recognition of the right-of-use assets and the related lease liabilities, with the exception of the Oakwood Village, Ohio lease, the options to extend the lease term have not been included as the Company is not reasonably certain that it will exercise any such option. At March 31, 2019, the weighted-average remaining lease term in years is 6.4 years and the weighted-average discount rate used is 7.7%.

During the three months ended March 31, 2019, the Company recognized the following lease costs and cash flow transactions arising from lease transactions:  

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	Three Months Ended March 31,
	2019
Operating lease cost	$	626
Cash paid for amounts included in the measurement of lease liabilities		514
Right-of-use assets obtained in exchange for new operating lease liabilities		492

At March 31, 2019, the future payments and interest expense for the operating leases are as follows:

Year Ending December 31,	Future Payments
The remainder of 2019	$	1,584
2020		2,522
2021		2,567
2022		2,496
2023		2,571
2024		2,604
Thereafter		1,924
Total undiscounted cash flows	$	16,268
Less: imputed interest		(3,493	)
Present value of lease liabilities	$	12,775

The rent expense for operating leases for the three months ended March 31, 2018 using the accounting guidance in effect at that time was $0.2 million.

At December 31, 2018, the future minimum payments for the operating leases were as follows (in thousands):

Year Ending December 31,	FutureMinimum Payments
2019	$	2,070
2020		2,353
2021		2,424
2022		2,496
2023		2,571
Thereafter		4,532
Total future minimum payments	$	16,446

Legal Proceedings

In the normal course of business, the Company may become involved in legal proceedings. The Company will accrue a liability for legal proceedings when it is probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. At March 31, 2019 and December 31, 2018, the Company was not involved in any material legal proceedings.

Purchase Commitments

At March 31, 2019 the Company had $7.3 million in outstanding firm purchase commitments.

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7. Revenue

The Company derives revenue primarily from the sale of MRIdian systems and related services as well as support and maintenance services on sold systems. Revenue is categorized as product revenue, service revenue and distribution rights revenue.

The following table presents revenue disaggregated by type and geography (in thousands):

	Three Months Ended March 31,
	2019		2018
U.S.
Product	$	—	$	13,535
Service		634		396
Total U.S. revenue	$	634	$	13,931
Outside of U.S. ("OUS")
Product	$	18,874	$	11,844
Service		657		296
Distribution rights		119		119
Total OUS revenue	$	19,650	$	12,259
Total
Product	$	18,874	$	25,379
Service		1,291		692
Distribution rights		119		119
Total revenue	$	20,284	$	26,190

Distribution agreement

In connection with the distribution agreement entered into in December 2014, between the Company and Itochu Corporation, or Itochu, the Company received a distribution fee of $4.0 million in three installments from Itochu for serving as the Company’s exclusive distributor for the sale and delivery of its MRIdian systems within Japan. In August 2016, the Company started recognizing distribution rights revenue ratably over the remaining term of the exclusive distribution agreement of approximately 8.5 years. A time-elapsed method is used to measure progress because control is transferred evenly over the remaining contractual period. The distribution rights revenue was $0.1 million for each of the three months ended March 31, 2019 and 2018.

Contract Balances

The timing of revenue recognition, billings and cash collections results in short-term and long-term trade receivables, customer deposits, deferred revenues and deferred cost of revenue on the condensed consolidated balance sheets.

Trade receivables are recorded at the original invoiced amount, net of an estimated allowance for doubtful accounts. Trade credit is generally extended on a short-term basis. The Company occasionally provides for long-term trade credit for its maintenance services so that the period between when the services are rendered to its customers and when the customers pay for that service is within one year. Thus, the Company’s trade receivables do not bear interest or contain a significant financing component. Long-term trade receivables of $0.4 million were reported within other assets in the condensed consolidated balance sheets at March 31, 2019 and at December 31, 2018. These amounts are billed in accordance with the terms of the customer contracts to which they relate and are expected to be collected three to four years from the date of invoice as the underlying maintenance services are rendered. At times, billing occurs subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. This contract asset is recorded as an unbilled receivable and reported as part of accounts receivable on the condensed consolidated balance sheets.

Trade receivables are periodically evaluated for collectability based on past credit history of the respective customers and their current financial condition. Changes in the estimated collectability of trade receivables are included in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for doubtful accounts. The Company generally does not require collateral for trade receivables. There was no allowance for doubtful accounts recorded at March 31, 2019 or December 31, 2018.

Customer deposits represent payments received in advance of system installation. For domestic and international sales, advance payments received prior to inventory shipments and customer acceptance are recorded as customer deposits. Advance payments are subsequently reclassified to deferred revenue upon inventory shipment when the title and risk of loss of inventory items transfer to customers. All customer deposits, including those that are expected to be a deposit for more than one year, are classified as current liabilities based on consideration of the Company’s normal operating cycle (the time between acquisition of the inventory components and the final cash collection from customers on these inventory components) which is in excess of one year.

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Deferred revenue consists of deferred product revenue and deferred service revenue. Deferred product revenue arises from timing differences between the fulfillment of contract obligations and satisfaction of all revenue recognition criteria consistent with the Company’s revenue recognition policy. Deferred service revenue results from the advance billing for services to be delivered over a period of time. Deferred revenues expected to be realized within one year or normal operating cycle are classified as current liabilities.

Deferred cost of revenue consists of cost for inventory items that have been shipped with title and risk of loss transferred to the customer, but the customer acceptance has not yet been received. Deferred cost of revenue is included as part of current assets as the corresponding deferred product revenue is expected to be realized within one year or the Company’s normal operating cycle.

During the three months ended March 31, 2019, the Company recognized $7.9 million of revenue that was included in the deferred revenue balance at the beginning of the reporting period. During the three months ended March 31, 2018, the Company recognized $22.2 million of revenue that was included in the deferred revenue balance at the beginning of the 2018 reporting period.

Variable Consideration

The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. The Company estimates the transaction price at contract inception, including any variable consideration, and updates the estimate each reporting period for any changes. For the three months ended March 31, 2019, the Company recognized $0.9 million in revenue from performance obligations satisfied in the prior period. The cumulative catch-up adjustment resulted from a change in transaction price related to variable consideration that was constrained in prior periods.

8. Equity Financing

Public Offering of Common Stock

On August 14, 2018, the Company entered into an underwriting agreement with Morgan Stanley & Co. LLC and Jefferies LLC, as representatives of several underwriters, or the “Underwriters”, in connection with the issuance and sale of 16,216,217 shares of the Company’s common stock at a public offering price of $9.25 per share. In addition, the Company granted the Underwriters a 30-day option to purchase up to 2,432,432 additional shares of common stock on the same terms, which the Underwriters exercised in full. The Company completed the offering on August 17, 2018 under which it received aggregate net proceeds of approximately $161.9 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

Direct Registered Offerings

In February 2018, the Company entered into a securities purchase agreement pursuant to which it sold (i) 4,090,000 shares of its common stock; (ii) 3,000,581 shares of its Series A convertible preferred stock and (iii) warrants to purchase 1,418,116 shares of its common stock, or the 2018 Offering Warrants, for total gross proceeds of $59.1 million, or the March 2018 Direct Registered Offering. The March 2018 Direct Registered Offering was closed on March 5, 2018. The 2018 Offering Warrants have an exercise price of $8.31 per share, became exercisable upon issuance and expire in March 2025.

Private Placements

In September 2016, the Company completed the final closing of a private placement offering, or the 2016 Private Placement, through which it sold (i) 4,602,506 shares of its common stock and (ii) warrants that provide the warrant holders the right to purchase 1,380,745 shares of common stock, or the 2016 Placement Warrants, and raised total gross proceeds of $13.8 million. The 2016 Placement Warrants have an exercise price of $2.95 per share, are exercisable at any time at the option of the holder and expire seven years from the date of issuance.

In January 2017, the Company completed the final closing of a private placement offering, or the 2017 Private Placement, through which it sold (i) 8,602,589 shares of its common stock and (ii) warrants that provide the warrant holders the right to purchase 1,720,512 shares of its common stock, or the 2017 Placement Warrants, and raised total gross proceeds of $26.1 million. The 2017 Placement Warrants have an exercise price of $3.17 per share, became exercisable in July 2017 and expire in January 2024.

At-The-Market Offering of Common Stock

In January 2017, the Company filed a shelf registration statement on Form S-3 with the SEC, which included a base prospectus covering the offering, issuance and sale of up to a maximum aggregate offering of $75.0 million of the Company’s common stock, preferred stock, debt securities, warrants, purchase contracts and/or units. In January and April 2017, the Company agreed to sell up to a cumulative $50.0 million of its common stock in accordance with the terms of a sales agreement with FBR Capital Markets & Co., pursuant to an at-the-market offering program in accordance with Rule 415(a)(4) under the Securities Act. In January 2019, the Company filed a registration statement with the SEC which covers the offering, issuance and sale of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units,

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including up to $100.0 million of the Company’s common shares pursuant to the Company’s at-the-market offering program with FBR.

As of March 31, 2019, the Company has sold approximately $40.4 million under this at-the-market offering program. No securities were sold in the three months ended March 31, 2019.

9. Warrants

Equity Classified Common Stock Warrants

In connection with a debt financing in December 2013, the Company issued warrants to purchase 128,231 shares of its common stock with an exercise price of $5.84 per share. These warrants are exercisable any time at the option of the holder until December 16, 2023. None of these warrants have been exercised to date and they all remained outstanding at March 31, 2019.

In connection with the merger of the Company and ViewRay Technologies, Inc. in July 2015, or the Merger, in July and August 2015, the Company conducted a private placement offering during which the Company issued warrants, or the 2015 Placement Warrants, that provide the warrant holder the right to purchase 198,760 shares of common stock at an exercise price of $5.00 per share. The 2015 Placement Warrants are exercisable at any time at the option of the holder until the five-year anniversary of its date of issuance. Prior to March 31, 2019, the Company issued 92,487 shares of its common stock upon the net exercise of 159,010 shares of the 2015 Placement Warrants. The remaining 39,750 shares of the 2015 Placement Warrants have not been exercised and remained outstanding at March 31, 2019.

In connection with the March 2018 Direct Registered Offering, the Company issued warrants to purchase 1,418,116 shares of common stock at an exercise price of $8.31 per share, or the 2018 Offering Warrants. The 2018 Offering Warrants became exercisable upon issuance and expire in March 2025. None of the 2018 Offering Warrants have been exercised to date and they all remained outstanding at March 31, 2019.

As separate classes of securities were issued in a bundled transaction, the gross proceeds from the March 2018 Direct Registered Offering of $59.1 million was allocated to common stock, Series A convertible preferred stock and the 2018 Offering Warrants based on their respective relative fair value upon issuance. The aggregate fair value of the 2018 Offering Warrants of $7.4 million was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected term of seven years, expected volatility of 62.5%, risk-free interest rate of 2.8% and expected dividend yield of 0%. The allocated proceeds from the 2018 Offering Warrants of $6.6 million was recorded in additional paid-in-capital.

Liability Classified Common Stock Warrants

In connection with private placement offerings in 2017 and 2016, the Company issued common stock warrants, or the 2017 and 2016 Placement Warrants, which contain protection whereby the warrant holders will have the right to receive cash in the amount equal to the Black-Scholes value of the warrants upon the occurrence of a Change of Control, as defined in the 2017 and 2016 Placement Warrants. The 2017 and 2016 Placement Warrants were accounted for as a liability at the date of issuance and are adjusted to fair value at each balance sheet date, with the change in fair value recorded as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive loss. The key terms of the 2017 and 2016 Placement Warrants are as follows:    

	Issuance Date	Term	Exercise Price Per Share		Warrants Exercised during the Three Months Ended March 31, 2019		Warrants Outstanding at March 31, 2019
2017 Placement Warrants	January 2017	7 years	$	3.17		6,022		1,703,510
2016 Placement Warrants	August and September 2016	7 years	$	2.95		15,549		1,115,066
Total						21,571		2,818,576

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During the three months ended March 31, 2019 and 2018, the Company recorded a loss of $3.0 million and a gain of $8.2 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. The fair value of the 2016 and 2017 Placement Warrants at March 31, 2019 and December 31, 2018, respectively, was estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions:

	2017 Placement Warrants				2016 Placement Warrants
	March 31, 2019		December 31, 2018		March 31, 2019	December 31, 2018
Expected term (in years)		4.8		5.1	4.4		4.7
Expected volatility	59.4%		60.8%		60.0%	60.9%
Risk-free interest rate	2.2%		2.5%		2.2%	2.5%
Expected dividend yield	0%		0%		0	0%

10. Stock-Based Compensation

A summary of the Company’s stock option activity and related information is as follows:

				Options Outstanding
	Shares Available for Grant			Number of Stock Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
											(In thousands)
Balance at December 31, 2018		1,908,626			11,603,708		$	6.64		7.6	$	10,151
Additional options authorized		3,853,280
Options granted		(1,872,022	)		1,872,022			8.28
Options exercised		-			(588,120	)		4.90
Options canceled		79,293			(79,293	)		7.49
RSUs granted		(651,392	)
Balance at March 31, 2019		3,317,785			12,808,317		$	6.95		7.9	$	16,290
Vested and exercisable at March 31, 2019					4,071,182		$	4.32		5.9	$	12,759
Vested and expected to vest at March 31, 2019					12,181,953		$	6.89		7.9	$	16,094

The weighted-average grant date fair value of options granted to employees was $4.78 and $4.75 per share during the three months ended March 31, 2019 and 2018, respectively. The grant date fair value of options vested was $1.2 million and $1.1 million during the three months ended March 31, 2019 and 2018, respectively.

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was $1.9 million and $1.6 million during the three months ended March 31, 2019 and 2018, respectively.

At March 31, 2019, total unrecognized compensation cost related to stock options granted to employees, net of estimated forfeitures, was $34.1 million which is expected to be recognized over a weighted-average period of 3.2 years.

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Determination of Fair Value

The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the estimated fair value of the Company’s common stock, as well as assumptions regarding a number of complex and subjective variables. The variables used to calculate the fair value of stock options using the Black-Scholes option-pricing model include actual and projected employee stock option exercise behaviors, expected price volatility of the Company’s common stock, the risk-free interest rate and expected dividends. Each of these inputs is subjective and generally requires significant judgment to determine.

The fair value of employee stock option is estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:  

	Three Months Ended March 31,
	2019		2018
Expected term (in years)		6.0		5.9
Expected volatility%	60.4%		61.7%
Risk-free interest rate%	2.6%		2.6%
Expected dividend yield%		0.0%		0.0%

Restricted Stock Units

From time to time, the Company grants Restricted Stock Units, or RSUs, to its board of directors for their services. These RSUs are either fully vested upon issuance or vest over a period of time from the grant date and will be released and settled upon termination of the board member’s services or the occurrence of a change in control event. In January 2019, the Company granted RSUs to its Board of Directors as part of the director compensation program. In March 2019, the Company granted RSUs to several employees. The fair value of RSUs is based on the closing market price of the Company’s common stock on the grant date.

	RSUs
	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2018		1,736,234		$	9.65
RSUs granted		651,392			7.69
RSUs vested		(21,149	)		6.33
Unvested at March 31, 2019		2,366,477		$	9.14
Vested and unreleased		142,656
Outstanding at March 31, 2019		2,509,133

The total grant date fair value of RSUs awarded was $5.0 million for the three months ended March 31, 2019. The total fair value of RSUs vested was $0.1 million for the three months ended March 31, 2019. There were no RSUs awarded or vested in the three months ended March 31, 2018.

As of March 31, 2019, total unrecognized stock-based compensation cost related to RSUs was $16.2 million, which is expected to be recognized over a weighted-average period of 2.3 years. As of March 31, 2019, 2,191,333 shares of RSUs are expected to vest.

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations and comprehensive loss is classified as follows (in thousands):

	Three Months Ended March 31, 2019
	2019		2018
Research and development	$	391	$	203
Selling and marketing		265		127
General and administrative		3,896		860
Total stock-based compensation expense	$	4,552	$	1,190

During the three months ended March 31, 2019 and 2018, there was no stock-based compensation expense capitalized as a component of inventory or recognized in cost of revenue. Stock-based compensation relating to stock-based awards granted to consultants was insignificant during the three months ended March 31, 2019 and 2018.

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11. Income Tax

Due to the current operating losses, the Company recorded zero income tax expense during the three months ended March 31, 2019 and 2018, respectively. During these periods, the Company’s activities were limited to U.S. federal and state tax jurisdictions, as it does not have any significant foreign operations. The federal and state effective tax rate before valuation allowance is approximately 24% for the three months ended March 31, 2019.

Due to the Company’s history of cumulative losses and after considering all the available objective evidence, management concluded that it is not more likely than not that all of the Company’s net deferred tax assets will be realized. Accordingly, the Company’s deferred tax assets, which includes net operating loss, or NOL, carryforwards and tax credits related primarily to research and development continue to be subject to a valuation allowance as of March 31, 2019. The Company expects to continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.      

The Company had unrecognized tax benefits of $2.1 million and $1.6 million at March 31, 2019 and December 31, 2018, respectively. The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.  

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense. At March 31, 2019, and December 31, 2018, there were no accrued interest and penalties related to uncertain tax positions.  

12. Net Loss per Share

Since the Company was in a loss position for all periods presented, diluted net loss per common share is the same as basic net loss per common share for all periods presented, because the inclusion of all potential common shares outstanding would have an anti-dilutive effect. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share for the periods presented, because including them would have an anti-dilutive effect:

	Three Months Ended March 31,
	2019		2018
Series A convertible preferred stock (if converted)		—		900,174
Options to purchase common stock		8,399,374		8,600,707
Common stock warrants		4,404,673		3,819,190
Restricted stock units		511,329		137,168
Total		13,315,376		13,457,239

13. Related Party Transactions

In December 2004, the Company entered into a licensing agreement with the University of Florida Research Foundation, or UFRF, whereby UFRF granted the Company a worldwide exclusive license to certain of UFRF’s patents in exchange for 33,652 shares of common stock and a 1% royalty, with a minimum $0.1 million royalty payment per quarter, from sales of products developed and sold by the Company utilizing the licensed patents. Minimum royalty payments in any calendar year are credited against earned royalties for such calendar year. Royalty expenses based on 1% of net sales were $0.2 million and $0.0 million during the three months ended March 31, 2019 and 2018, respectively, and were recorded as product cost of revenue.

In January 2017, the Company entered into a sales consulting agreement with Puissance Capital Management, or PCM, to assist with business development activities in a key market in Asia. PCM is the investment manager of Puissance Cross Board Opportunities LLP, a stockholder in the Company. Theodore T. Wang, Ph.D., a member of the Company’s board of directors, is the managing member of the general partners of PCM. The sales consulting agreement has a term of one year with a total consideration of $1.3 million. This amount has been fully expensed in the first quarter of 2018.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The interim financial statements included in this Quarterly Report on Form 10-Q and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2018, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report filed with the SEC on March 15, 2019. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in this Quarterly Report that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements.

Unless otherwise indicated, references in this section to “ViewRay,” “we,” “us,” “our” and “the Company” refer to ViewRay, Inc. and its consolidated subsidiary, ViewRay Technologies, Inc.

As a result of the merger of the Company and ViewRay Technologies, Inc. in July 2015, or the Merger, and the change in business and operations of the Company, a discussion of the past financial results of the Company is not pertinent, and under applicable accounting principles the historical financial results of ViewRay Technologies, Inc., the accounting acquirer, prior to the Merger are considered the historical financial results of the Company.

The following discussion highlights ViewRay’s results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on ViewRay’s unaudited condensed consolidated financial statements contained in this Quarterly Report, which we have prepared in accordance with U.S. GAAP. You should read the discussion and analysis together with such condensed consolidated financial statements and the related notes thereto.

Company Overview

We design, manufacture and market the ViewRay MRIdian®. The MRIdian is an innovative system that integrates high quality radiation therapy with simultaneous magnetic resonance imaging (MRI). There are two generations of the MRIdian: the first generation MRIdian with Cobalt-60 based radiation beams and the second generation MRIdian Linac, with more advanced linear accelerator or ‘linac’ based radiation beams.

The MRIdian combines MRI and external-beam radiation therapy to simultaneously image and treat cancer patients. MRI is a broadly used imaging tool that has the ability to clearly differentiate between types of soft tissue. In contrast, X-ray or computed tomography (CT), the most commonly used imaging technologies in radiation therapy today, are often unable to distinguish soft tissues such as the tumor and critical organs. MRIdian integrates MRI technology, radiation delivery and our proprietary software to clearly See the soft tissues, Shape the dose to accommodate for changes in anatomy and Strike the target precisely using real-time targeting throughout the treatment. The MRIdian system is Sized to fit into standard radiation therapy vaults without having to remove ceiling or walls. These capabilities allow MRIdian to deliver radiation to the tumor accurately, while reducing the radiation amount delivered to nearby healthy tissue, as compared to other radiation therapy treatments currently available. We believe this will lead to improved patient outcomes and reduced treatment-related side effects.

Both generations of the MRIdian have received 510(k) marketing clearance from the US Food and Drug Administration, or FDA, and permission to affix the Conformité Européene, or CE, mark.  

• We received initial 510(k) marketing clearance from the FDA for our treatment planning and delivery software in January 2011.

• We received 510(k) marketing clearance for MRIdian, with Cobalt-60 as the radiation source, in May 2012. We received permission to affix the CE mark to MRIdian with Cobalt-60 in November 2014, allowing MRIdian with Cobalt-60 to be sold within the European Economic Area, or EEA. In August 2016, we received regulatory approval from the Japanese Ministry of Health, Labor and Welfare to market MRIdian with Cobalt-60 in Japan. In August 2016, we also received approval from the China Food and Drug Administration to market MRIdian with Cobalt-60 in China.

• In September 2016, we received the CE mark for the MRIdian Linac (with a linear accelerator as the radiation source) in the EEA. In February 2017, we received 510(k) clearance from the FDA to market MRIdian Linac. In June 2017, we received 510(k) clearance to market RayZR™, our high-resolution beam-shaping multi-leaf collimator. We also received MRIdian Linac regulatory approval in Taiwan and Canada in August 2017, and in Israel in November 2017. In March 2018, we received regulatory approval from the Japanese Ministry of Health, Labor and Welfare to market MRIdian Linac in Japan. We are also seeking required MRIdian Linac approvals in other countries.

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MRIdian is the first radiation therapy solution that enables simultaneous radiation treatment delivery and real-time MRI imaging of a patient’s internal anatomy.  It generates high-quality images that differentiate between the targeted tumor, surrounding soft tissue and nearby critical organs. MRIdian also records the level of radiation dose that the treatment area has received, enabling physicians to adapt the prescription between treatments, as needed. We believe this improved visualization and accurate dose recording will enable better treatment, improve patient outcomes and reduce side effects.  Key benefits to users and patients include: improved imaging and patient alignment; the ability to adapt the patient’s radiation treatments to changes while the patient is still on the treatment table, or “on-table adaptive treatment planning”; MRI-based motion management; and an accurate recording of the delivered radiation dose.  Physicians have already used MRIdian to treat a broad spectrum of radiation therapy patients with more than 45 different types of cancer, as well as patients for whom radiation therapy was previously not an option.

At March 31, 2019, we had six MRIdian with Cobalt-60 systems and 25 MRIdian Linac systems at 24 customers worldwide (10 in the United States and 14 outside the United States).

We currently market MRIdian through a direct sales force in North America. In the rest of the world, we market MRIdian through a hybrid model of both a direct sales force and distribution network. We market MRIdian to a broad range of worldwide customers, including university research and teaching hospitals, community hospitals, private practices, government institutions and freestanding cancer centers. As with the traditional linac market, our sales and revenue cycle vary based on the particular customer and can be lengthy, sometimes lasting up to 18 to 24 months (or more) from initial customer contact to order contract execution. Following execution of a sales contract, it generally takes nine to 15 months for a customer to customize an existing facility or construct a new vault. Upon the commencement of installation at a customer’s facility, it typically takes approximately 60 to 90 days for us to install MRIdian and perform on-site testing of the system, including the completion of acceptance test procedures.

We generated total revenue of $20.3 million and $26.2 million, and had net losses of $33.4 million and $4.8 million, during the three months ended March 31, 2019 and 2018, respectively.

We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:

• add personnel to support our product development and commercialization efforts;

• continue our research and development efforts;

• seek regulatory approval for MRIdian in certain foreign countries; and

• operate as a public company.

Accordingly, we may seek to fund our operations through public or private equity, debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop enhancements to and integrate new technologies into MR Image-Guided radiation therapy systems.

New Orders and Backlog

New orders are defined as the sum of gross product orders, representing MRIdian contract price, recorded in backlog during the period. Backlog is the accumulation of all orders for which revenue has not been recognized and which we consider valid. Backlog includes customer deposits or letters of credit, except when the sale is to a customer where a deposit is not deemed necessary or customary. Deposits received are recorded in a customer deposit liability account on the balance sheet. Orders may be revised or cancelled according to their terms or upon mutual agreement between the parties. Therefore, it is difficult to predict with certainty the amount of backlog that will ultimately result in revenue. The determination of backlog includes objective and subjective judgment about the likelihood of an order contract becoming revenue. We perform a quarterly review of backlog to verify that outstanding orders in backlog remain valid, and based upon this review, orders that are no longer expected to result in revenue are removed from backlog. Among other criteria to consider for a transaction to be in backlog, we must possess both an outstanding and effective written agreement for the delivery of a MRIdian signed by a customer with a minimum customer deposit or a letter of credit requirement except when the sale is to a customer where a deposit is not deemed necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, sales via tender awards, or indirect channel sales that have signed contracts with end-customers). We decide whether to remove or add back an order from or to our backlog by evaluating the following criteria: changes in customer or distributor plans or financial conditions; the customer’s or distributor’s continued intent and ability to fulfill the order contract; changes to regulatory requirements; the status of regulatory approval required in the customer’s jurisdiction, if any; the length of time the order has been on our backlog; and other reasons for potential cancellation of order contracts.

During the three months ended March 31, 2019, we received new orders for MRIdian systems totaling $42.8 million. At March 31, 2019, we had total backlog of $237.5 million.

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Components of Statements of Operations

Revenue

Product Revenue. Product revenue consists of revenue recognized from sales of MRIdian systems, as well as optional components, such as additional planning workstations and body coils.

Following execution of an order contract, it generally takes nine to 15 months for a customer to customize an existing facility or construct a new vault for the purchased system. Upon the commencement of installation at a customer’s facility, it typically takes approximately 60 to 90 days to complete the installation and on-site testing of the system, including the completion of acceptance test procedures. On-site training takes approximately one week and can be conducted concurrently with installation and acceptance testing. Order contracts generally include customer deposits upon execution of the agreement, and in certain cases, additional amounts due at shipment or commencement of installation, and final payment due generally upon customer acceptance.

Revenue recognition for MRIdian systems that we install generally occurs when the customer acknowledges that the system operates in accordance with standard product specifications, the customer accepts the installed unit and the control of the system is transferred to the customer. For sales of MRIdian systems for which we are not responsible for installation, revenue is recognized when the entire system is delivered, which is when the control of the system is transferred to the customer.

Service Revenue. Our contracts typically include service warranty at no additional costs for one year. In addition, we offer multi-year, post-installation maintenance and support contracts that provide various levels of service support, which enables our customers to select the level of on-going support services, including parts and labor, which they require. These post-installation contracts are for a period of one to five years and provide services ranging from on-site parts and labor, and preventative maintenance to labor only with a longer response time. We also offer technology upgrades to our MRIdian systems, when and if available, for an additional fee. Service revenue is recognized ratably over the term during which the contracted services are provided.

Distribution Rights Revenue.In December 2014, we entered into a distribution agreement with Itochu Corporation, or Itochu, pursuant to which we appointed Itochu as our exclusive distributor for the promotion, sale and delivery of MRIdian products within Japan. As consideration for the exclusive distribution rights granted, we received $4.0 million, which was recorded as deferred revenue and since August 2016, distribution rights revenue has been recognized ratably over the remaining term of the distribution agreement, which expires in December 2024. A time-elapsed method is used to measure progress because the control is transferred evenly over the contractual period.

Cost of Revenue

Product Cost of Revenue. Product cost of revenue primarily consists of the cost of materials, installation and services associated with the manufacturing and installation of MRIdian systems, and royalty payments to the University of Florida Research Foundation. Product cost of revenue also includes lower of cost or net realizable value inventory, or LCNRV, adjustments if the carrying value of the inventory is greater than its net realizable value. There was no LCNRV charge for the three months ended March 31, 2019 and 2018.

We expect our materials, installation and service costs to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs. We expect to continue to lower costs as we transition to MRIdian Linac.  

Service Cost of Revenue.Service cost of revenue is comprised primarily of personnel costs, training and travel expenses to service and perform maintenance on installed MRIdian systems. Service cost of revenue also includes the costs of replacement parts under maintenance and support contracts.

Operating Expenses

Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel expenses. Other significant research and development costs arise from third-party consulting services, laboratory supplies, research materials, medical equipment, computer equipment and licensed technology, and related depreciation and amortization. We expense research and development costs as incurred. As we continue to invest in improving MRIdian and developing new technologies, we expect our research and development expenses to increase.

Selling and Marketing. Selling and marketing expenses consist primarily of compensation and related costs for our direct sales force, sales management, and marketing and customer support personnel, and include stock-based compensation, employee benefits and travel expenses. Selling and marketing expenses also include costs related to trade shows and marketing programs. We expense selling and marketing costs as incurred. We expect selling and marketing expenses to increase in future periods as we expand our sales force and our marketing and customer support organizations and increase our participation in trade shows and marketing programs.

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General and Administrative. Our general and administrative expenses consist primarily of compensation and related costs for our operations, finance, human resources, regulatory, and other administrative personnel, and include stock-based compensation, employee benefits and travel expenses. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, quality and regulatory functions and facilities costs, and gain or loss on the disposal of property and equipment. We expect our general and administrative expenses to increase as our business grows and as we invest in the development of our MRIdian Linac.

Interest Income

Interest income consists primarily of interest income received on our cash and cash equivalents.

Interest Expense

Interest expense consists primarily of interest and amortization related to our SVB Term Loan.

Other Income (Expense), Net

Other income (expense), net consists primarily of changes in the fair value of the 2017 and 2016 Placement Warrants and foreign currency exchange gains and losses.

The outstanding 2017 and 2016 Placement Warrants are re-measured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as a component of other income (expense), net.  

Results of Operations

The following tables set forth our results of operations for the periods presented:

	Three Months Ended March 31,
	2019			2018
	(in thousands)
Revenue:
Product	$	18,874		$	25,379
Service		1,291			692
Distribution rights		119			119
Total revenue		20,284			26,190
Cost of revenue:
Product		22,033			19,711
Service		3,615			909
Total cost of revenue		25,648			20,620
Gross margin		(5,364	)		5,570
Operating expenses:
Research and development		5,031			3,770
Selling and marketing		4,885			3,246
General and administrative		15,109			9,846
Total operating expenses:		25,025			16,862
Loss from operations		(30,389	)		(11,292	)
Interest income		220			2
Interest expense		(759	)		(1,866	)
Other (expense) income, net		(2,433	)		8,342
Loss before provision for income taxes		(33,361	)		(4,814	)
Provision for income taxes		—			—
Net loss	$	(33,361	)	$	(4,814	)

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Comparison of the Three Months Ended March 31, 2019 and 2018

Revenue

	Three Months Ended March 31,
	2019		2018		Change
	(in thousands)
Product	$	18,874	$	25,379	$	(6,505	)
Service		1,291		692		599
Distribution rights		119		119		-
Total revenue	$	20,284	$	26,190	$	(5,906	)

Total revenue during the three months ended March 31, 2019 decreased by $5.9 million compared to the three months ended March 31, 2018. The decrease was primarily due to a $6.5 million decrease in product revenue, partially offset by a $0.6 million increase in service revenue during the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Product Revenue. Product revenue decreased by $6.5 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The decrease was due to the revenue recognized during the three months ended March 31, 2019 on one fewer MRIdian Linac system in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.

Service Revenue. Service revenue increased by $0.6 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to the increase in installed base.

Distribution Rights Revenue. Distribution rights revenue remained flat, as expected based on the ratable recognition of revenue over the term of this agreement, during the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Cost of Revenue

	Three Months Ended March 31,
	2019		2018		Change
	(in thousands)
Product	$	22,033	$	19,711	$	2,322
Service		3,615		909		2,706
Total cost of revenue	$	25,648	$	20,620	$	5,028

Product Cost of Revenue. Product cost of revenue increased by $2.3 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Total cost of revenue in the three months ended March 31, 2019 was impacted by approximately $7.0 million of charges, primarily driven by higher than anticipated installation costs related to historical upgrade commitments. The $7.0 million includes $5.6 million of one-time charges and $1.4 million of expenses.This increase was partially offset by cost of revenue recognized on one fewer MRIdian Linac system in the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.

Service Cost of Revenue. Service cost of revenue increased by $2.7 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2019 primarily due to timing of services and increase in installed base for the three months ended March 31, 2019, as well as increased headcount of field service engineers.

Operating Expenses

	Three Months Ended March 31,
	2019		2018		Change
	(in thousands)
Research and development	$	5,031	$	3,770	$	1,261
Selling and marketing		4,885		3,246		1,639
General and administrative		15,109		9,846		5,263
Total operating expenses	$	25,025	$	16,862	$	8,163

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Research and Development. Research and development expenses during the three months ended March 31, 2019 increased by $1.3 million, compared to the three months ended March 31, 2018. The increase was primarily attributable to a $1.4 million increase in personnel expense related to an increase in headcount and a $0.1 million increase in facilities costs, partially offset by a $0.2 million decrease in outside services.

Selling and Marketing. Sellingand marketing expenses during the three months ended March 31, 2019 increased by $1.6 million, compared to the three months ended March 31, 2018. This increase was primarily attributable to a $0.9 million increase in personnel expense related to the increase in our direct salesforce, $0.3 million increase in travel from the aforementioned increasing salesforce and a $0.3 million increase in marketing expense.

General and Administrative. General and administrative expenses during the three months ended March 31, 2019 increased by $5.3 million, compared to the three months ended March 31, 2018. This increase was primarily driven by a $4.6 million increase in personnel expense related to an increase in headcount, which included a $3.0 million increase in stock-based compensation expense for the increased headcount and executives hired since the first quarter of 2018. Additionally, we incurred a $0.5 million increase in facilities cost, a $0.3 million increase in consulting costs for former executives retained as consultants and a $0.3 million increase in travel costs. These increases were partially offset by a $0.6 million reduction in legal costs as there were no equity offerings this quarter.

Interest Expense

	Three Months Ended March 31,
	2019			2018			Change
	(in thousands)
Interest expense	$	(759	)	$	(1,866	)	$	1,107

Interest expense decreased during the three months ended March 31, 2019 compared to the three months ended March 31, 2018, due to the lower interest rate of the SVB Term Loan as compared to the CRG Term Loan, which was paid off in December 2018.  

Other (Expense) Income, Net

	Three Months Ended March 31,
	2019			2018		Change
	(in thousands)
Other (expense) income, net	$	(2,433	)	$	8,342	$	(10,775	)

Other (expense) income, net during the three months ended March 31, 2019 consisted primarily of a $3.1 million increase in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants and was partially offset by $0.9 million of income related to insurance proceeds. Other (expense) income, net during the three months ended March 31, 2018 consisted primarily of a $8.2 million decrease in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants.

Liquidity and Capital Resources

Since our inception in 2004, we have incurred significant net losses and negative cash flows from operations. During the three months ended March 31, 2019 and 2018, we had net losses of $33.4 million and $4.8 million, respectively. At March 31, 2019 and December 31, 2018, we had an accumulated deficit of $432.3 million and $399.0 million, respectively.

At March 31, 2019 and December 31, 2018, we had cash and cash equivalents of $145.8 million and $167.4 million, respectively. To date, we have financed our operations principally through offerings of our capital stock, issuances of warrants, issuances of convertible promissory notes, use of term loans and receipts of customer deposits for new orders and payments from customers for systems installed and delivered. We may, from time to time, seek to raise capital through a variety of sources, including the public equity market, private equity financing, and public or private debt. In March 2018, we issued common stock, Series A convertible preferred stock and warrants to purchase common stock in the March 2018 Direct Registered Offering for gross proceeds of $59.1 million. In May 2018, we raised additional aggregate gross proceeds of $0.3 million through our at-the-market offering program under which we sold 33,097 shares of our common stock at an average sale price of $8.41 per share. In August 2018, we raised aggregate gross proceeds of $172.5 million via a public offering, in which we sold approximately 18.6 million shares of our common stock at a price of $9.25 per share. In December 2018, we entered into SVB Term Loan for a principal amount of $56.0 million. We used the proceeds from the SVB Term Loan and cash on hand to repay in full our obligations under the outstanding CRG Term Loan. We

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expect that our existing cash and cash equivalents, together with the sales of MRIdian systems will enable us to conduct our planned operations for at least the next 12 months.

In January 2019, we filed a registration statement with the SEC which covers the offering, issuance and sale of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units, including up to $100.0 million of our common shares pursuant to our at-the-market offering program with FBR.

We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future operating needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K.

The following table summarizes our cash flows for the periods presented (in thousands):

	Three Months Ended March 31,
	2019			2018
Cash used in operating activities	$	(23,653	)	$	(37,454	)
Cash used in investing activities	$	(1,249	)	$	(497	)
Cash provided by financing activities	$	2,716		$	59,478

Operating Activities

We have historically experienced cash outflows as we developed MRIdian with Cobalt-60 and MRIdian Linac and expanded our business. Our primary source of cash flow from operating activities is cash receipts from customers including sales of MRIdian systems and, to a lesser extent, up-front payments from customers. Our primary uses of cash from operating activities are amounts due to vendors for purchased components and employee-related expenditures.

During the three months ended March 31, 2019, cash used in operating activities was $23.7 million, as a result of our net loss of $33.4 million and the aggregate non-cash charges of $14.4 million. Our net operating assets and liabilities increased by $4.7 million in the three months ended March 31, 2019. Inventory increased $15.8 million, in anticipation of upcoming shipments and installations of MRIdian systems. Customer deposits and deferred revenue decreased $8.7 million as a result of revenue recognized for the three units of MRIdian system sales and one unit of system upgrade partially offset by additional accrual for the units currently being installed. The net change in our operating assets and liabilities was partially offset by a decrease in accounts receivable of $6.8 million resulting from the timing of collections. Deferred costs decreased by $4.6 million mainly due to the revenue recognized in the first three months of 2019. Accounts payable increased $7.0 million resulting from the build of inventory and the resulting payments. Accrued expense and other liabilities increased by a $1.3 million mainly due to an increase in payroll and related benefits and accrued travel costs. Non-cash charges included $4.6 million of stock-based compensation expense, $0.9 million of depreciation and amortization expense, a $3.1 million loss related to the change in fair value of the 2017 and 2016 Placement Warrants, $5.6 million for historical upgrade commitments and $0.1 million of amortization of debt discount and interest accrual related to the SVB Term Loan.

During the three months ended March 31, 2018, cash used in operating activities was $37.5 million, as a result of our net loss of $4.8 million and a $27.2 million net change in our operating assets and liabilities and aggregate non-cash charges of $5.5 million. The net change in our operating assets and liabilities was primarily a result of a change in customer deposits and deferred revenue, inventory, accounts receivable and deposits on purchased inventory, which was partially offset by a change in deferred cost of revenue and accounts payable. Inventory and deposits on purchased inventory increased $12.0 million and $3.0 million, respectively, in anticipation of upcoming shipments and installations of MRIdian systems. Customer deposits and deferred revenue decreased $18.6 million as a result of revenue recognized for the four units of MRIdian system sales and one unit of system upgrade in the first three months of 2018. Accounts receivable increased $5.8 million resulting from the timing of collection. The net change in our operating assets and liabilities was partially offset by a $9.1 million decrease in deferred cost of revenue mainly due to the revenue recognized for the four units of MRIdian system sales and one unit of system upgrade in the first three months of 2018 and $2.1 million increase in accounts payable resulting from the timing of payments. Non-cash charges included a $8.2 million gain related to the change in fair value of the 2017 and 2016 Placement Warrants, which was partially offset by $1.2 million of stock-based compensation expense, $0.9 million amortization of debt discount and interest accrual related to the CRG Term Loan and $0.7 million of depreciation and amortization expense.

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Investing Activities

Cash used in investing activities of $1.2 million and $0.5 million during the three months ended March 31, 2019 and 2018, respectively, resulted from capital expenditures to purchase property and equipment.

Financing Activities

During the three months ended March 31, 2019, financing activities provided $2.7 million in cash, consisting primarily of $2.9 million from the exercise of stock options.

During the three months ended March 31, 2018, financing activities provided $59.5 million in cash, consisting of $59.1 million gross proceeds from the March 2018 Direct Registered Offering and $0.4 million in proceeds from the exercise of stock options.

SVB Term Loan

In December 2018, we entered into the SVB Term Loan for a principal amount of $56.0 million. The SVB Term Loan has a maturity date of December 1, 2023 and bears interest at a rate of 6.30% per annum to be paid monthly over the term of the loan. Beginning on December 1, 2020 (or June 1, 2021, if the Company achieves a trailing twelve-month revenue of at least a specified amount and elects to apply such later date), the Company will make thirty-six equal monthly payments of principal (or thirty equal payments, if the Company so elects). In addition, upon repayment of the SVB Term Loan in full, the Company will make a final payment equal to 3.15% of the original aggregate principal amount of the SVB Term Loan. The SVB Term Loan contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions and transactions with affiliates. The SVB Term Loan also contains financial covenants that require the Company to maintain a minimum cash balance in accounts maintained at Silicon Valley Bank or one of its affiliates or else comply with a liquidity ratio and/or a minimum revenue target.

We were in compliance with all financial covenants under the SVB Term Loan at March 31, 2019.

Off-Balance Sheet Arrangements and Contractual Obligations

We did not have any off-balance sheet arrangements as of March 31, 2019. As of December 31, 2018, we did not have any off-balance sheet arrangements except for our operating leases. Additionally, there were no material changes to our contractual obligations described in our Annual Report on Form 10-K filed with the SEC on March 15, 2019, except for the changes to operating lease obligations due to the adoption of Topic 842, Leases. See the section entitled “Notes to Condensed Consolidated Financial Statements – Note 6 – Commitments and Contingencies” in the condensed consolidated financial statements.

For our contractual obligations that are expected to have an effect on our liquidity and cash flow, see section “Notes to Condensed Consolidated Financial Statements – Note 6 – Commitments and Contingencies” in the condensed consolidated financial statements and “Note 5 – Debt” in the condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

With the exception of the adoption of Topic 842, Leases, (see the section entitled “Notes to Condensed Consolidated Financial Statements – Note 2 – Summary of Significant Accounting Policies” in the condensed consolidated financial statements), there have been no significant changes to our accounting policies during the three months ended March 31, 2019, as compared to the critical accounting policies described in our Annual Report on Form 10-K filed with the SEC on March 15, 2019. We believe that the accounting policies discussed in that Annual Report are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

JOBS Act Accounting Election

We are an “emerging growth company” within the meaning of the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

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Recently Issued and Adopted Accounting Pronouncements

We review new accounting standards to determine the expected financial impact, if any, that the adoption of each new standard will have. For the recently issued and adopted accounting standards that we believe may have an impact on our condensed consolidated financial statements, see the section entitled “Notes to Condensed Consolidated Financial Statements – Note 2 – Summary of Significant Accounting Policies” in the condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer, or CEO, and chief financial officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO have concluded that as of March 31, 2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (SEC), and that such required information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the first quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently involved in any material litigation. From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved and on our business generally.  In addition, regardless of their merits or their ultimate outcomes, lawsuits and legal proceedings are costly, divert management attention and may materially adversely affect our reputation, even if resolved in our favor.

The information under the caption “Commitments and Contingencies” in Note 6 of the unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2018. If any of the risks discussed in our Annual Report on Form 10-K are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.

Exhibit		Incorporated by Reference			Filed
Number	Description	Form	Exhibit	Date Filed	Herewith
2.1	Agreement and Plan of Merger and Reorganization, dated as of July 23, 2015, by and among ViewRay Inc., Acquisition Sub and ViewRay Technologies, Inc.	S-1/A	2.1	12/16/15
3.1	Amended and Restated Certificate of Incorporation.	S-1/A	3.1	12/16/15
3.2	Amended and Restated Bylaws of ViewRay, Inc.	8-K	3.2	5/10/18
10.1†	Offer Letter to James Alecxih				X
31.1	Certification of Principal Executive Officer Required under Securities Exchange Act Rule 13a-14(a) and 15d-14(a).				X
31.2	Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a) and 15d-14(a).				X
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350 and Securities Exchange Act Rule 13a-14(b).				X
101	Interactive Data Files of Financial Statements and Notes.				X
101.INS	Instant Document				X
101.SCH	XBRL Taxonomy Schema Document				X
101.CAL	XBRL Taxonomy Calculation Linkbase Document				X
101.DEF	XBRL Taxonomy Definition Linkbase Document				X
101.LAB	XBRL Taxonomy Label Linkbase Document				X
101.PRE	XBRL Taxonomy Presentation Linkbase Document				X

_____________________

†  Indicates management contract or compensatory plan.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

VIEWRAY, INC.

Dated: May 3, 2019	By:	/s/ Scott Drake
	Name:	Scott Drake
	Title:	Chief Executive Officer
		(Principal Executive Officer)

Dated: May 3, 2019	By:	/s/ Ajay Bansal
	Name:	Ajay Bansal
	Title:	Chief Financial Officer
		(Principal Financial Officer)

31