ViewRay (VRAYQ) 10-Q 2020 Q3 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 September 30, 2020

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:

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

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 (§232.405 of this chapter) 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, a 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  ☒

As of October 29, 2020, the registrant had 148,499,601 shares of common stock, $0.01 par value per share, outstanding.

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 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	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
	Signatures	36

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:

• the effect of coronavirus and its associated disruption to the global economy and our business operations and financial condition;

• 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 Part II, Item 1A, titled “Risk Factors” and discussed elsewhere in this Report, and in Part I, Item 1A, titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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)

	September 30, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	163,881		$	226,783
Accounts receivable		26,548			16,817
Inventory		46,456			55,031
Deposits on purchased inventory		4,254			6,457
Deferred cost of revenue		8,705			3,466
Prepaid expenses and other current assets		4,659			3,310
Total current assets		254,503			311,864
Property and equipment, net		22,533			23,399
Restricted cash		1,460			1,404
Intangible assets, net		51			55
Right-of-use assets		10,055			11,720
Other assets		1,485			1,577
TOTAL ASSETS	$	290,087		$	350,019
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,607		$	13,739
Accrued liabilities		17,966			21,390
Customer deposits		16,080			9,662
Operating lease liability, current		2,251			2,264
Current portion of long-term debt		15,556			1,556
Deferred revenue, current		21,838			10,457
Total current liabilities		81,298			59,068
Deferred revenue, net of current portion		2,884			3,553
Long-term debt		40,134			53,995
Warrant liabilities		4,092			5,373
Operating lease liability, noncurrent		8,816			10,479
Other long-term liabilities		1,827			1,377
TOTAL LIABILITIES		139,051			133,845
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, par value of $0.01 per share; 10,000,000 shares authorized    at September 30, 2020 and December 31, 2019; 0 shares issued and outstanding    at September 30, 2020 and December 31, 2019		0			0
Common stock, par value of $0.01 per share; 300,000,000 shares authorized at    September 30, 2020 and December 31, 2019; 147,954,426 and 147,191,695 shares    issued and outstanding at September 30, 2020 and December 31, 2019		1,469			1,462
Additional paid-in capital		750,552			733,888
Accumulated deficit		(600,985	)		(519,176	)
TOTAL STOCKHOLDERS’ EQUITY		151,036			216,174
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	290,087		$	350,019

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 September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenue:
Product	$	6,210		$	18,696		$	28,295		$	65,475
Service		3,758			2,048			9,909			5,482
Distribution rights		118			118			356			356
Total revenue		10,086			20,862			38,560			71,313
Cost of revenue:
Product		8,550			18,521			34,393			63,368
Service		2,600			1,767			8,380			9,489
Total cost of revenue		11,150			20,288			42,773			72,857
Gross margin		(1,064	)		574			(4,213	)		(1,544	)
Operating expenses:
Research and development		5,245			5,641			17,793			17,135
Selling and marketing		2,669			7,297			11,585			19,845
General and administrative		16,031			19,381			47,046			49,888
Total operating expenses		23,945			32,319			76,424			86,868
Loss from operations		(25,009	)		(31,745	)		(80,637	)		(88,412	)
Interest income		5			484			787			1,391
Interest expense		(1,074	)		(1,069	)		(3,183	)		(2,902	)
Other (expense) income, net		(2,047	)		11,499			1,224			4,933
Loss before provision for income taxes	$	(28,125	)	$	(20,831	)	$	(81,809	)	$	(84,990	)
Provision for income taxes		0			0			0			0
Net loss and comprehensive loss	$	(28,125	)	$	(20,831	)	$	(81,809	)	$	(84,990	)
Net loss per share, basic and diluted	$	(0.19	)	$	(0.21	)	$	(0.55	)	$	(0.87	)
Weighted-average common shares used to compute net loss per    share attributable to common stockholders, basic and diluted		148,042,972			99,039,789			147,683,344			97,763,964

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

5

VIEWRAY, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share and per share data)

(Unaudited)

	Common Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
Three Months Ended September 30, 2020
Balance at June 30, 2020		147,616,373	$	1,466	$	745,418		$	(572,860	)	$	174,024
Stock-based compensation		—		—		5,759			—			5,759
Issuance of common stock from releases of restricted stock units		338,053		3		(3	)		—			—
Tax withholding paid on behalf of employees for stock-based awards		—		—		(622	)		—			(622	)
Net loss		—		—		—			(28,125	)		(28,125	)
Balance at September 30, 2020		147,954,426	$	1,469	$	750,552		$	(600,985	)	$	151,036
Nine Months Ended September 30, 2020
Balance at December 31, 2019		147,191,695	$	1,462	$	733,888		$	(519,176	)	$	216,174
Issuance of common stock from option exercises		20,579		—		15			—			15
Stock-based compensation		—		—		17,063			—			17,063
Issuance of common stock from releases of restricted stock units		659,920		6		(6	)		—			—
Tax withholding paid on behalf of employees for stock-based awards		—		—		(754	)		—			(754	)
Issuance of common stock from employee stock purchase plan		82,232		1		155			—			156
Write-down of offering costs related to previous issuance of common stock upon public offering		—		—		191			—			191
Net loss		—		—		—			(81,809	)		(81,809	)
Balance at September 30, 2020		147,954,426	$	1,469	$	750,552		$	(600,985	)	$	151,036

	Common Stock
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
Three Months Ended September 30, 2019
Balance at June 30, 2019		98,259,203	$	973	$	585,080		$	(463,136	)	$	122,917
Issuance of common stock from option exercises		517,624		5		1,433			—			1,438
Stock-based compensation		—		—		4,910			—			4,910
Issuance of common stock from releases of restricted stock units		335,863		3		(3	)		—			—
Tax withholding paid on behalf of employees for stock-based awards		—		—		(2,410	)		—			(2,410	)
Issuance of common stock from warrant exercises		293,115		3		(3	)		—			—
Reclassification of warrant liability to additional paid-in capital upon warrant exercises		—		—		1,871			—			1,871
Net loss		—		—		—			(20,831	)		(20,831	)
Balance at September 30, 2019		99,405,805	$	984	$	590,878		$	(483,967	)	$	107,895
Nine Months Ended September 30, 2019
Balance at December 31, 2018		96,332,023	$	952	$	565,334		$	(398,977	)	$	167,309
Issuance of common stock from option exercises		2,219,251		23		9,618			—			9,641
Stock-based compensation		—		—		14,369			—			14,369
Issuance of common stock from releases of restricted stock units		390,332		4		(4	)		—			—
Tax withholding paid on behalf of employees for stock-based awards		—		—		(2,410	)		—			(2,410	)
Issuance of common stock from warrant exercises		464,199		5		(5	)		—			—
Reclassification of warrant liability to additional paid-in capital upon warrant exercises		—		—		3,976			—			3,976
Net loss		—		—		—			(84,990	)		(84,990	)
Balance at September 30, 2019		99,405,805	$	984	$	590,878		$	(483,967	)	$	107,895

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

6

VIEWRAY, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(81,809	)	$	(84,990	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,372			3,156
Stock-based compensation		17,063			14,369
Accretion on asset retirement obligation		62			22
Change in fair value of warrant liabilities		(1,281	)		(4,674	)
Loss on disposal of property and equipment		121			0
Inventory lower of cost or net realizable value adjustment		150			0
Amortization of debt discount and interest accrual		527			472
Product upgrade reserve		(1,260	)		4,431
Changes in operating assets and liabilities:
Accounts receivable		(9,731	)		3,566
Inventory		8,425			(10,514	)
Deposits on purchased inventory		2,203			3,259
Deferred cost of revenue		(6,937	)		1,951
Prepaid expenses and other assets		(1,268	)		852
Accounts payable		(6,031	)		1,231
Accrued expenses and other long-term liabilities		(1,416	)		4,774
Customer deposits and deferred revenue		17,130			(14,537	)
Net cash used in operating activities		(59,680	)		(76,632	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,201	)		(7,541	)
Purchase of intangible asset		0			(57	)
Net cash used in investing activities		(2,201	)		(7,598	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of offering costs related to common stock public offering		(539	)		0
Payment of debt issuance cost		0			(168	)
Proceeds from the exercise of stock options		15			9,641
Proceeds from employee stock purchase plan		313			0
Payments for taxes related to net share settlement of equity awards		(754	)		(2,410	)
Net cash (used in) provided by financing activities		(965	)		7,063
NET (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(62,846	)		(77,167	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — BEGINNING OF PERIOD		228,187			169,365
CASH, CASH EQUIVALENTS AND RESTRICTED CASH — END OF PERIOD	$	165,341		$	92,198
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	2,695		$	2,879
Cash paid for taxes	$	28		$	7
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fair value of common stock warrants reclassified from liability to additional paid-in capital upon exercise	$	0		$	3,976
Right-of-use assets obtained in exchange for new operating lease liabilities	$	0		$	1,647
Transfer of property and equipment from inventory and deferred cost of revenue	$	1,698		$	4,446
Purchases of property and equipment in accounts payable and accrued liabilities	$	381		$	491

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

7

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 Conformité Européene, or CE, mark to MRIdian with Cobalt-60 in the European Economic Area, or EEA, 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. In February 2019, the Company received 510(k) clearance from the FDA for advancements in MRI, 8 frames per second cine, and Functional imaging (T1/T2/DWI) and High-Speed MLC. In December 2019, we received the CE mark for these advancements in the EEA.

The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for a reasonable period of time. The Company’s principal sources of liquidity are cash flows from public and private offerings and available borrowings under its term loan agreement, as well as cash receipts from its sales of MRIdian systems. These have historically been sufficient to meet working capital needs, capital expenditures, operating expenses, and debt service obligations. During the nine months ended September 30, 2020, the Company incurred a net loss from operations of $81.8 million and used cash in operations of $59.7 million. The Company believes that its existing cash balance of $163.9 million as of September 30, 2020, together with anticipated cash proceeds from sales of MRIdian systems will be sufficient to provide liquidity to fund its obligations for at least the next 12 months.

2. Summary of Significant Accounting Policies

Basis of Presentation

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

In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements, have been included. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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, 2019.

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, 2019 filed with the SEC on March 12, 2020, and have not changed significantly since that filing.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.  Topic 740 reduces complexity in certain areas of accounting for income taxes and makes minor improvements to the codification. The ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is still evaluating the impact of this update but does not believe it will have a material impact on its consolidated financial statements and related disclosures.

8

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU 2020-06, an update to ASC Topic 470, Subtopic - 20, Debt - Debt with Conversion and Other Options, and ASC Topic 815, Subtopic – 40, Derivatives and Hedging - Contracts in Entity's Own Equity. The ASU simplifies the guidance for certain financial instruments with characteristics of liability and equity, including convertible instruments and contracts on an entity’s own equity by reducing the number of accounting models for convertible instruments and amends guidance in ASC Topic 260, Earnings Per Share, relating to the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. The ASU is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2021, with early adoption permitted for fiscal years that begin after December 15, 2020. The Company is currently evaluating the impact this guidance may have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

Effective January 1, 2020, the Company adopted FASB ASU 2018-13, Fair Value Measurements (Topic 820). Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The standard eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information, and modifies some disclosure requirements. As the result of the adoption the Company is no longer required to disclose (1) the amount of and the reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation process for Level 3 fair value measurements. Additionally, the Company is required to disclose (1) the changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. No significant changes were made to our fair value disclosures in the notes to the condensed consolidated financial statements in order to comply with ASU 2018-13. Refer to Note 4, Fair Value of Financial Instruments.

3. Balance Sheet Components

Property and Equipment, Net

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

	September 30, 2020			December 31, 2019
Prototype	$	16,901		$	16,419
Machinery and equipment		16,431			15,816
Leasehold improvements		6,857			6,718
Furniture and fixtures		1,295			1,284
Software		1,389			1,389
Construction in progress		6,117			4,176
Property and equipment, gross		48,990			45,802
Less: accumulated depreciation and amortization		(26,457	)		(22,403	)
Property and equipment, net	$	22,533		$	23,399

Depreciation and amortization expense related to property and equipment were $1.4 million and $1.2 million during the three months ended September 30, 2020 and 2019, and $4.4 million and $3.2 million during the nine months ended September 30, 2020 and 2019, respectively.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Accrued payroll and related benefits	$	9,958	$	9,577
Accrued accounts payable		2,653		4,764
Payroll withholding tax, sales and other tax payable		1,460		1,066
Accrued legal, accounting and professional fees		825		1,175
Product upgrade reserve		2,534		3,794
Other		536		1,014
Total accrued liabilities	$	17,966	$	21,390

9

Deferred Revenue

Deferred revenue consisted of the following (in thousands):

	September 30, 2020			December 31, 2019
Deferred revenue:
Product	$	14,329		$	3,141
Service		8,353			8,473
Distribution rights		2,040			2,396
Total deferred revenue		24,722			14,010
Less: current portion of deferred revenue		(21,838	)		(10,457	)
Noncurrent portion of deferred revenue	$	2,884		$	3,553

Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):

	September 30, 2020		December 31, 2019
Accrued interest, noncurrent portion	$	904	$	516
Asset retirement obligation		923		861
Total other-long term liabilities	$	1,827	$	1,377

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—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

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

The Company’s financial instruments that are carried at fair value mainly consist of Level 1 assets and Level 3 liabilities. Level 1 assets include highly liquid bank deposits and money market funds, which were not material at September 30, 2020 and December 31, 2019. 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). During the nine months ended September 30, 2020, 0 warrants were exercised. During the nine months ended September 30, 2019, warrants to purchase 464,199 shares of common stock were exercised and the aggregate fair value upon exercise of $4.0 million was reclassified from liabilities to additional paid-in-capital.

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 and nine months ended September 30, 2020, the Company recorded a loss of $2.0 million and a gain of $1.3 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants. During the three and nine months ended September 30, 2019, the Company recorded a gain of $13.5 million and a gain of $8.6 million, respectively, related to the change in fair value of the 2017 and 2016 Placement Warrants.

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

	At September 30, 2020
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	0	$	0	$	3,092	$	3,092
2016 Placement Warrants Liability		0		0		1,000		1,000
Total	$	0	$	0	$	4,092	$	4,092

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	December 31, 2019
	Level 1		Level 2		Level 3		Total
2017 Placement Warrants Liability	$	0	$	0	$	1,330	$	1,330
2016 Placement Warrants Liability		0		0		4,043		4,043
Total	$	0	$	0	$	5,373	$	5,373

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

	Nine Months Ended September 30,
	2020			2019
Fair value, beginning of period	$	5,373		$	11,844
Change in fair value of Level 3 financial liabilities		(1,281	)		(4,674	)
Fair value of 2016 Placement Warrants at exercise		0			(3,458	)
Fair value of 2017 Placement Warrants at exercise		0			(518	)
Fair value, end of period	$	4,092		$	3,194

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 NaN equal monthly payments of principal (or 30 equal payments, if the Company so elects). In addition, upon repayment of the SVB Term Loan in full, the Company will make a final payment equal to 3.15% of the original aggregate principal amount of the SVB Term Loan.

The Company used the proceeds of the SVB Term Loan and cash on hand to repay in full its outstanding obligations under its then outstanding term loan, or the CRG Term Loan, and to pay fees and expenses related thereto. The Company accounted for the termination of the CRG Term Loan as a debt extinguishment and recorded a debt extinguishment loss of $2.4 million from the difference between the net carrying amount of debt and the amount paid. The debt extinguishment loss includes $0.3 million in write-offs of unamortized debt discount and debt issuance costs associated with the CRG Term Loan.

The Company received net proceeds 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 requires that the Company maintain a minimum cash balance in accounts at Silicon Valley Bank or one of its affiliates or else comply with a liquidity ratio and/or a minimum revenue financial covenant. On December 31, 2019, the Company entered into the First Amendment (the First Amendment) to the SVB Term Loan. The First Amendment, among other things, amended the SVB Term Loan to (i) suspend testing of the minimum revenue financial covenant for the fiscal quarter ended December 31, 2019, (ii) provide for the minimum trailing twelve-month revenue thresholds under the minimum revenue financial covenant for periods ending on the last day of fiscal quarters in fiscal years subsequent to 2020 to be determined annually at the greater of (a) a 25% cushion to revenue forecasts provided by the Company to SVB and (b) 10% year-over-year annual growth, unless otherwise agreed, (iii) increase the minimum liquidity ratio financial covenant from 1.50:1.00 to 1.75:1.00 and (iv) increase the prepayment premium from 1.00% to 2.00% for amounts prepaid under the SVB Term Loan prior to the maturity date thereof, subject to certain exceptions. On October 30, 2020, the Company entered into the Second Amendment (the Second Amendment) to the SVB Term Loan. Refer to Note 14, Subsequent Events.

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 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,

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including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the SVB Term Loan, which could harm the Company's financial condition.

The Company’s scheduled future payments on the SVB Term Loan at September 30, 2020 are as follows (in thousands):

Year Ended December 31,
The remainder of 2020	$	1,555
2021		18,667
2022		18,667
2023		17,111
2024		0
Total future principal payments		56,000
Less: unamortized debt discount		(310	)
Carrying value of long-term debt		55,690
Less: current portion		(15,556	)
Long-term portion	$	40,134

Refer to Note 14, Subsequent Events, for details of the amended SVB Term Loan entered into as of October 30, 2020.

6. Commitments and Contingencies

Operating Leases

The Company entered into agreements to lease office space in Oakwood Village, Ohio, Mountain View, California and Denver, Colorado under noncancelable operating lease agreements.

In April 2008, the Company entered into an agreement to lease approximately 19,800 square feet of office space in Oakwood Village, Ohio, which expires in October 2021.

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

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

In May 2019, the Company entered into a sub-lease agreement to lease approximately 19,800 square feet of office space located in Denver, Colorado. The sub-lease commenced in June 2019 and will expire in July 2021.  

In recognition of the right-of-use assets and the related lease liabilities, the options to extend the lease term have not been included as the Company is not reasonably certain that it will exercise any such option. At September 30, 2020, the weighted-average remaining lease term in years is 4.8 years and the weighted-average discount rate used is 7.7%.

The Company recognized the following lease costs arising from lease transactions (in thousands):  

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Operating lease cost	$	781	$	782	$	2,344	$	2,085

The Company recognized the following cash flow transactions arising from lease transactions (in thousands):

	Nine Months Ended September 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities	$	2,355	$	1,742
Right-of-use assets obtained in exchange for new operating lease liabilities		0		1,647

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At September 30, 2020, the future payments and interest expense for the operating leases are as follows (in thousands):

Year Ending December 31,	Future Payments
The remainder of 2020	$	792
2021		2,831
2022		2,497
2023		2,571
2024		2,604
2025		1,924
Total undiscounted cash flows	$	13,219
Less: imputed interest		(2,152	)
Present value of lease liabilities	$	11,067

Legal Proceedings

In the normal course of business, the Company may become involved in legal proceedings. The Company will accrue a liability for legal proceedings when it is probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued.

Patent Litigation

On September 10, 2019, a complaint for patent infringement was filed by Varian Medical Systems, Inc., in U.S. District Court for the Northern District of California against the Company. Captioned Varian Medical Systems, Inc., v. ViewRay, Inc., the complaint alleges that the Company infringes 2 related patents, U.S. Patent Nos. 8,637,841 and 9,082,520 and seeks injunctive relief and monetary damages. The Company filed its answer on November 1, 2019. The District Court matter was stayed on October 23, effective through December 7, 2020. The Company believes the allegations in the complaint are without merit and intends to vigorously defend the litigation.

On July 7, 2020 and July 31, 2020, the Company filed a petition with the Patent Trial & Appeal Board of the United States Patent and Trademark Office (PTAB), requesting institution of inter partes review (IPR) and cancellation of claims 1-3, 5-8, 10, 13, 14 of Varian’s U.S. Patent No. 9,082,520. On August 13, 2020, the Company filed a separate petition with the PTAB, requesting an IPR and cancellation of claims 1-4 and 20-22 of Varian’s U.S. Patent No. 8,637,841.

Class Action Litigation

On September 13, 2019, a class action complaint for violation of federal securities laws was filed in U.S. District Court for the Northern District of Ohio against the Company, its chief executive officer, chief scientific officer, and former chief financial officer. On December 19, 2019, the court appointed Plymouth County Retirement Association as the lead plaintiff, and on February 28, 2020 the lead plaintiff filed an amended complaint asserting securities fraud claims against the Company, its chief executive officer, chief operating officer, chief scientific officer, and former chief executive officer and former chief financial officer. Now captioned Plymouth County Retirement Association v. ViewRay, Inc., et al., the amended complaint alleges that the Company violated federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts concerning the its business, operations, and financial results, and seeks damages, interest, and other relief. The Company filed a motion to dismiss the amended complaint on May 28, 2020. While the initial motion to dismiss was pending, the plaintiff was granted leave to file a second amended complaint. A motion to dismiss the second amended complaint was filed on September 16, 2020, and that motion has been fully briefed. The Company believes the allegations in the complaint are without merit and intends to vigorously defend the litigation.

Stockholder Derivative Lawsuit

On July 22, 2020, a stockholder derivative lawsuit was filed against ViewRay (as a nominal defendant) and certain of its current and former officers and directors in the U.S. District Court for the Northern District of Ohio. This action alleges, purportedly on behalf of ViewRay, that the officers and directors violated Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets, and were unjustly enriched based on factual assertions substantially similar to those in the class action complaint described above. The complaint seeks, among other things, damages awarded to ViewRay, restitution and disgorgement of profits in an unspecified amount, and corporate reforms. Due to the overlap between the allegations in the derivative complaint and those in the putative securities class action complaint, this lawsuit is stayed until December 3, 2020, pending a decision on the motion to dismiss the second amended complaint in the securities action.

Given the early stage of each of the litigation matters described above, at this time the Company is unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect on the period in which they are resolved and on our business generally. In addition, regardless of their merits or their ultimate outcomes,

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lawsuits and legal proceedings are costly, divert management attention and may materially adversely affect our reputation, even if resolved in our favor.

Purchase Commitments

At September 30, 2020, the Company had $1.6 million in outstanding firm purchase commitments.

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
U.S.
Product	$	618	$	6,107	$	7,920	$	28,394
Service		2,168		1,140		5,664		3,094
Total U.S. revenue	$	2,786	$	7,247	$	13,584	$	31,488
Outside of U.S. ("OUS")
Product	$	5,592	$	12,589	$	20,375	$	37,081
Service		1,590		908		4,245		2,388
Distribution rights		118		118		356		356
Total OUS revenue	$	7,300	$	13,615	$	24,976	$	39,825
Total
Product	$	6,210	$	18,696	$	28,295	$	65,475
Service		3,758		2,048		9,909		5,482
Distribution rights		118		118		356		356
Total revenue	$	10,086	$	20,862	$	38,560	$	71,313

Arrangements with Multiple Performance Obligations

The Company frequently enters into sales arrangements that include multiple performance obligations. Such performance obligations mainly consist of (i) sale of MRIdian systems, which generally includes installation and embedded software, and (ii) product support, which includes extended service and maintenance. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The standalone selling price, or SSP, is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, the Company will estimate the SSP considering market conditions or internally approved pricing guidelines related to the performance obligations.

Product Revenue

Product revenue is derived primarily from the sales of MRIdian systems. The system contains both software and non-software components that together deliver essential functionality.

For contracts in which control of the system transfers upon delivery and inspection, the Company recognizes revenue for the systems at the point in time when delivery and inspection by the customer has occurred. For these same contracts, the Company recognizes installation revenue over the period of installation as the installation services are performed and control is transferred to the customer. For all contracts in which control transfers upon post-installation customer acceptance, revenue for the system and installation are recognized upon customer acceptance.

Certain customer contracts with distributors do not require ViewRay to complete installation at the ultimate user site, and the distributors may either perform the installation themselves or hire another party to perform the installation. For sales of MRIdian systems for which the Company is not responsible for installation, revenue recognition generally occurs when the entire system is shipped, which is when the control of the system is transferred to the customer.

Service Revenue

Service revenue is derived primarily from maintenance services. The maintenance and support service is a stand-ready obligation which is performed over the term of the arrangement and, as a result, service revenue is recognized ratably over the service period as the customers benefit from the service throughout the service period.

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Distribution Rights Revenue

In December 2014, the Company entered into a distribution agreement with Itochu Corporation pursuant to which it appointed Itochu as its exclusive distributor for the promotion, sale and delivery of its MRIdian products within Japan. In consideration of the exclusive distribution rights granted, the Company received $4.0 million, which was recorded as deferred revenue. Starting in August 2016, the distribution rights revenue is recognized ratably over the remaining term of the 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.

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 credit losses. 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 $0.1 million and $0.2 million were reported within other assets in the condensed consolidated balance sheets at September 30, 2020 and at December 31, 2019, respectively. These amounts are billed in accordance with the terms of the customer contracts to which they relate and are expected to be collected two to three 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 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 estimated allowance for credit losses. The Company generally does not require collateral for trade receivables. There were 0 estimated allowances for credit losses recorded at September 30, 2020 or December 31, 2019.

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

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

Deferred cost of revenue consists of cost for inventory items that have been shipped, but revenue recognition has not yet occurred. Deferred cost of revenue is included as part of current assets as the corresponding deferred product revenue is expected to be realized within one year or the Company’s normal operating cycle.

During the three and nine months ended September 30, 2020, the Company recognized $2.0 million and $7.4 million of revenues that was included in the deferred revenue balance at the beginning of the reporting period. During the three and nine months ended September 30, 2019, the Company recognized $1.0 million and $10.2 million of revenues that were included in the deferred revenue balance at the beginning of the 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. There were 0 amounts recognized during the three and nine months ended September 30, 2020 from performance obligations satisfied in the prior period. For the three and nine months ended September 30, 2019, the Company recognized $0.0 million and $0.9 million in revenue from performance obligations satisfied in the prior period.

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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 August 2018 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 August 2018 Underwriters a 30-day option to purchase up to 2,432,432 additional shares of common stock on the same terms, which the August 2018 Underwriters exercised in full. The Company completed the offering on August 17, 2018 and received aggregate net proceeds of approximately $161.9 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company.

On December 3, 2019, the Company entered into an underwriting agreement with Piper Jaffray & Co., as representatives of several underwriters, or the December 2019 Underwriters, in connection with the issuance and sale of 41,550,000 shares of our common stock at a public offering price of $3.13 per share. In addition, the Company granted the December 2019 Underwriters a 30-day option to purchase up to 6,232,500 additional shares of common stock on the same terms, which the December 2019 Underwriters exercised in full. The Company completed the offering on December 6, 2019 and received aggregate net proceeds of approximately $138.6 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 2019, the Company filed a registration statement with the SEC which covers the offering, issuance and sale of up to a maximum aggregate offering price of $250.0 million of our common stock, preferred stock, debt securities, warrants, purchase contracts and/or units, including up to $100.0 million of the Company’s common shares that may be sold pursuant to the Company’s at-the-market offering program with FBR Capital Markets & Co. (“FBR”). The shares in the December 2019 Public Offering of Common stock were sold pursuant to the January 2019 registration statement and did not impact the $100.0 million of our common shares pursuant to our at-the-market offering program with FBR. The Company has 0t sold any securities under the 2019 registration statement pursuant to its at-the-market offering program.

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. In August 2019, the Company issued 36,457 shares of its common stock upon the net exercise of 128,231 2013 Placement Warrants. All of the December 2013 Placement Warrants have been exercised and 0ne of the warrants are outstanding at September 30, 2020.

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 as part of 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. During the year ended December 31, 2018, the Company issued 92,487 shares of its common stock upon the net exercise of 159,010

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shares of the 2015 Placement Warrants. The remaining 39,750 shares of the 2015 Placement Warrants expired in July and August 2020 and 0ne remained outstanding at September 30, 2020.

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. The 2018 Offering Warrants became exercisable upon issuance and expire in March 2025. None of the 2018 Offering Warrants have been exercised to date and they all remained outstanding at September 30, 2020.

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 were 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 assumptions:

	Upon Issuance
Common Stock Warrants:
Expected term (in years)		7.0
Expected volatility (%)	62.5%
Risk-free interest rate (%)	2.8%
Expected dividend yield (%)	0%

The allocated proceeds from the 2018 Offering Warrants of $6.6 million were recorded in additional paid-in-capital.

Liability Classified Common Stock Warrants

In connection with the 2017 and 2016 Private Placements, the Company issued warrants that provide the warrant holder the right to purchase 1,720,512 and 1,380,745 shares of common stock. The 2017 and 2016 Placement Warrants 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 warrant agreement. 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 (expense) income, net in the condensed consolidated statements of operations and comprehensive loss. The key terms of the 2017 and 2016 Placement Warrants are as follows:

	Issuance Date	Term	Exercise Price Per Share		Warrants Exercised during the Nine Months Ended September 30, 2020		Warrants Outstanding at September 30, 2020
2017 Placement Warrants	January 2017	7 years	$	3.17		0		1,618,890
2016 Placement Warrants	August and September 2016	7 years	$	2.95		0		537,263
Total						0		2,156,153

During the three and nine months ended September 30, 2020, the Company recorded a loss of $2.0 million and a gain of $1.3 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. During the three and nine months ended September 30, 2019, the Company recorded a gain of $13.5 million and $8.6 million, respectively, related to the change in fair value of the 2016 and 2017 Placement Warrants. The fair value of the 2016 and 2017 Placement Warrants at September 30, 2020 and December 31, 2019, respectively, was estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions:

	2017 Placement Warrants				2016 Placement Warrants
	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Expected term (in years)		3.3		4.0		2.9		3.6
Expected volatility	77.9%		68.0%		77.0%		67.5%
Risk-free interest rate	0.2%		1.7%		0.2%		1.6%
Expected dividend yield	0.0%		0.0%		0.0%		0.0%

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10. Stock-Based Compensation

A summary of the Company’s stock award 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, 2019		948,415			11,165,846		$	7.44		7.6	$	1,907
Additional shares authorized		9,137,667
Options granted		(736,579	)		736,579			1.97
Options exercised		—			(20,579	)		0.72
Options cancelled or forfeited		3,496,601			(3,496,601	)		6.99
Withheld shares to pay for taxes on released RSUs		299,898
RSUs granted		(5,981,966	)
RSUs cancelled or forfeited		599,623
Balance at September 30, 2020		7,763,659			8,385,245		$	7.12		7.6	$	2,273
Vested and exercisable at September 30, 2020					5,180,433		$	7.11		7.1	$	1,199
Vested and expected to vest at September 30, 2020					8,095,506		$	7.15		7.5	$	2,134

Stock Options

The weighted-average grant date fair value of options granted to employees was $1.20 and $4.71 per share during the nine months ended September 30, 2020 and 2019, respectively. The grant date fair values of options vested was $7.6 million and $11.4 million during the nine months ended September 30, 2020 and 2019, respectively.

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic values of options exercised was $0.0 million and $7.8 million during the nine months ended September 30, 2020 and 2019, respectively.

At September 30, 2020, total unrecognized compensation cost related to stock options granted to employees, net of estimated forfeitures, was $11.8 million which is expected to be recognized over a weighted-average period of 2.1 years.

Determination of Fair Value

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

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

	Nine Months Ended September 30,
	2020		2019
Expected term (in years)		6.0		6.0
Expected volatility	68.8%		60.7%
Risk-free interest rate	0.7%		2.4%
Expected dividend yield	0.0%		0.0%

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Restricted Stock Units

From time to time, the Company grants Restricted Stock Units, or RSUs, to its board of directors and certain employees for their services. Certain board members elected RSUs in lieu of retainer and committee service fees, which 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 and June 2020, the Company granted RSUs to its Board of Directors as part of the director compensation program. The January 2020 RSUs granted to board members vested in full on the date of our 2020 Annual Meeting of Stockholders. The June 2020 RSUs granted to board members vest in full on the date of our 2021 Annual Meeting of Stockholders. In January and June 2020, the Company granted RSUs to the Company’s CEO that vest annually at 42% on the first anniversary date of the grant, and 29% on the second and third anniversary date of the grant. In January and March of 2020, the Company granted RSUs to several employees. These RSUs vest in equal annual installments over three years from the grant date and are subject to the participants continuing service to the Company over that period. The fair value of RSUs is based on the closing market price of the Company’s common stock on the grant date.

	RSUs
	Number of Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2019		4,379,777		$	5.14
RSUs granted		5,981,966			2.78
RSUs vested		(996,529	)		8.14
RSUs forfeited		(599,623	)		3.13
Unvested at September 30, 2020		8,765,591		$	3.33
Vested and unreleased		153,055
Outstanding at September 30, 2020		8,918,646

The total grant date fair value of RSUs awarded and RSUs vested was $16.7 million and $8.1 million, respectively, for the nine months ended September 30, 2020.

As of September 30, 2020, total unrecognized stock-based compensation cost related to RSUs, net of estimated forfeitures, was $21.1 million which is expected to be recognized over a weighted-average period of 2.0 years. At September 30, 2020, 8,266,088 shares of RSUs are expected to vest.

Stock-Based Compensation Expense

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Cost of revenue	$	217	$	757	$	725	$	1,967
Research and development		549		1,076		1,705		2,900
Selling and marketing		258		385		817		1,027
General and administrative		4,735		2,692		13,816		8,475
Total stock-based compensation expense	$	5,759	$	4,910	$	17,063	$	14,369

Stock-based compensation relating to stock-based awards granted to consultants was insignificant during the three and nine months ended September 30, 2020 and 2019.

11. Income Tax

Due to the current operating losses, the Company recorded 0 income tax expense during the three and nine months ended September 30, 2020 and 2019, respectively. During these periods, the Company’s activities were limited to U.S. federal and state tax jurisdictions, as it does not have any significant foreign operations. The federal and state effective tax rate before valuation allowance is approximately 24% for the nine months ended September 30, 2020.

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 in the future. Accordingly, the Company’s deferred tax assets, which include net operating loss, or NOL, carryforwards and tax credits related primarily to research and development, continue to be subject to a valuation allowance as of September 30, 2020. The Company expects to continue to maintain a full valuation allowance until there is sufficient evidence to support recoverability of its deferred tax assets.

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The Company had unrecognized tax benefits of $2.5 million and $2.2 million at September 30, 2020 and December 31, 2019, respectively. The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. Unrecognized tax benefits may change during the next 12 months for items that arise in the ordinary course of business.  

Interest and/or penalties related to income tax matters are recognized as a component of income tax expense. At September 30, 2020 and December 31, 2019, there were 0 accrued interest and penalties related to uncertain tax positions.  

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the nine months ended September 30, 2020.

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Options to purchase common stock		8,859,188		11,350,034		9,341,730		10,613,157
Common stock warrants		3,585,264		3,866,555		3,604,364		4,200,541
Restricted stock units		2,207,144		437,933		5,275,149		1,206,267
Total		14,651,596		15,654,522		18,221,243		16,019,965

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 $0.1 million and $0.5 million during the three and nine months ended September 30, 2020, respectively, and were recorded as product cost of revenue. Royalty expenses based on 1% of net sales were $0.2 million and $0.6 million during the three and nine months ended September 30, 2019, respectively, and were recorded as product cost of revenue.

In November 2019, the Company entered into a distribution agreement with Chindex Shanghai International Trading Company Limited, or Chindex, which became effective in February 2020. Chindex is a subsidiary of Fosun International Limited, or Fosun. Kevin Xie, Ph.D., a member of the Company’s board of directors, was previously designated by Fosun for election to the board pursuant to a Securities Purchase Agreement dated October 23, 2017 and related to the Company’s 2017 direct registered offering of common stock.

Under the distribution agreement, Chindex will act as the Company’s distributor and regulatory agent for the sale and delivery of its MRIdian products within the People’s Republic of China, excluding Hong Kong, Macau and Taiwan. The distribution agreement has an initial term of five years with an option to renew for an additional five years. Under the distribution agreement, the Company will supply its products and services to Chindex based on an agreed upon price between the Company and Chindex. In accordance with the agreement, Chindex agreed to pay ViewRay an upfront fee, portions of which may be refundable under certain conditions, of $3.5 million, payable in 3 installments: (i) the first installment of $1.5 million due approximately 60 days after the effectiveness of the distribution agreement; (ii) the second installment of $1.0 million due on the first anniversary from the effective date of the agreement; and (iii) the third installment of $1.0 million due on the second anniversary from the effective date of the agreement. NaN amounts have been received as of September 30, 2020 as there have been delays with certain regulatory requirements needed to collect the first installment. Currently, the Company expects the first installment to be received in the fourth quarter of 2020.

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14. Subsequent Events

On October 30, 2020, the Company entered into the Second Amendment (the Second Amendment) to the SVB Term Loan. The Second Amendment, among other things, amended the SVB Term Loan to (i) increase the term loan agreement principal amount from $56.0 million to $58.0 million, (ii) revise the NaN equal monthly payments of principal to begin on November 1, 2022, (iii) revise the maturity date to October 1, 2025, (iv) decrease the interest rate from a fixed rate of 6.3% to a floating rate of 2.4% above the Prime Rate, which equates to 5.65% as of October 30, 2020, (v) increase the final payment from 3.15% of the original aggregate principal amount to 3.7% of the revised aggregate principal amount, (vi) revise the minimum trailing twelve-month revenue thresholds under the minimum revenue financial covenant for periods ending on the last day of fiscal quarters in fiscal years subsequent to 2020, (vii) decrease the minimum liquidity ratio financial covenant from 1.75:1.00 to 1.70:1.00, (viii) remove the minimum cash balance as a condition of the minimum revenue financial covenant and the minimum liquidity ratio financial covenant, and (ix) increase the prepayment premium from 2.00% to 3.00% for the first 30 months of the term for amounts prepaid under the SVB Term Loan prior to the maturity date thereof, subject to certain exceptions. In connection with the execution of the Second Amendment, the Company agreed to pay the earned portion of the final payment, which equated to $0.8 million.

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, 2019, 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 12, 2020. 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 and the Annual 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 our 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 our 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 FDA and permission to affix the CE mark.  

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

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• 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 as well as 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 the United States.

• 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.

• In February 2019, we received 510(k) clearance for advancements in MRI, 8 frames per second cine, and Functional imaging (T1/T2/DWI) and High-Speed MLC. In December 2019, we received the CE mark for these advancements in the EEA.

• We are also seeking required MRIdian Linac approvals in other countries.

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 tissue tracking and automated beam gating; 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 65 different types of cancer, as well as patients for whom radiation therapy was previously not an option. During the third quarter of 2020, we surpassed a significant milestone by treating more than 10,000 patients.

At September 30, 2020, a total of 40 MRIdian systems, four MRIdian with Cobalt-60 systems and 36 MRIdian Linac systems, are in operation with 37 customers worldwide (16 in the United States and 21 outside the United States). In addition, six MRIdian Linacs have been delivered to customers that are in varying stages of deployment.

We currently market MRIdian through a direct sales force in the United States. 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 cycles 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 an order 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 45 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 $10.1 million and $20.9 million, and had net losses of $28.1 million and $20.8 million, during the three months ended September 30, 2020 and 2019, respectively. We generated total revenue of $38.6 million and $71.3 million, and net losses of $81.8 and $85.0 million, during the nine months ended September 30, 2020 and 2019, respectively.

We expect to continue to incur significant expenses and operating losses for the foreseeable future, as we:

• navigate our business activities through the impacts of the coronavirus pandemic;

• 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.

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Impact of the Coronavirus Disease

The coronavirus pandemic, the resulting global recession and its follow-on effects have impacted and will continue to impact business activity across industries worldwide, including ViewRay.

Due to pandemic-related factors like the delays in service from our global supply chain partners and restrictions imposed by government agencies and our customers in response to the spread of coronavirus, we have experienced delays in installation of systems in the United States, Asia and Europe. Similarly, our ability to conduct commercial efforts with our customers has been and is likely to continue to be disrupted as customers have in most cases suspended in-person sales calls and turned their focus to dealing with the impact of the coronavirus on their operations. Should the global recession persist as a result of the impact of coronavirus, our ability to conduct our business and access capital markets will be negatively impacted; and capital equipment sales, which makes up the majority of our revenue, may take longer than other areas of the economy in a recovery, which may have a material impact on our business. The coronavirus pandemic continues to develop rapidly, and its continued global economic impact may negatively impact our operations in areas that we are not aware of currently.

In the first quarter of 2020, we initiated a contingency plan with the goal to reduce our cash usage by approximately $30 million during the remainder of 2020, largely through reductions in operating expense, working capital and company-wide salary reductions. Regarding company-wide salary reductions, our executive leadership team, including our board of directors, reduced their salaries by as much as 30%, and reductions were then cascaded down at lesser rates through the organization. The company-wide salary reductions remain in effect for our executive leadership team, including our board of directors. However, the reductions at lesser rates for others in our organization were restored in October 2020. In late June 2020, we finalized and communicated a plan to reduce our workforce by approximately 20%. The plan was implemented on July 6, 2020. As of September 30, 2020, we remain on track with our contingency plan to reduce cash usage by approximately $30 million.

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 nine months ended September 30, 2020, we received twelve new orders for MRIdian systems, totaling $70.6 million. At September 30, 2020, we had total backlog of $238.9 million.

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 45 to 90 days to complete the installation and on-site testing of the system, including the completion of customer test procedures. On-site training can take up to multiple weeks 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.

Beginning in the second quarter of 2019, for new contracts in which control of the system transfers upon delivery and inspection, the Company recognizes revenue for the system at the point in time when delivery and inspection has occurred. For these same contracts, the Company recognizes installation revenue over a period of time as control of the installation services are transferred. For all contracts in which control continues to transfer upon post-installation customer acceptance, revenue for the system and installation

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will continue to be recognized upon customer acceptance. 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. We recorded LCNRV charges of $0.0 million and $0.2 million for the three and nine months ended September 30, 2020, respectively. There were no LCNRV charges for the three or nine months ended September 30, 2019.

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.

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. We will continue to invest in improving MRIdian and developing new technologies.

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.

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.

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 (Expense) Income, Net

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

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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 (expense) income, net.  

Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
	(in thousands)
Revenue:
Product	$	6,210		$	18,696		$	28,295		$	65,475
Service		3,758			2,048			9,909			5,482
Distribution rights		118			118			356			356
Total revenue		10,086			20,862			38,560			71,313
Cost of revenue:
Product		8,550			18,521			34,393			63,368
Service		2,600			1,767			8,380			9,489
Total cost of revenue		11,150			20,288			42,773			72,857
Gross margin		(1,064	)		574			(4,213	)		(1,544	)
Operating expenses:
Research and development		5,245			5,641			17,793			17,135
Selling and marketing		2,669			7,297			11,585			19,845
General and administrative		16,031			19,381			47,046			49,888
Total operating expenses:		23,945			32,319			76,424			86,868
Loss from operations		(25,009	)		(31,745	)		(80,637	)		(88,412	)
Interest income		5			484			787			1,391
Interest expense		(1,074	)		(1,069	)		(3,183	)		(2,902	)
Other (expense) income, net		(2,047	)		11,499			1,224			4,933
Loss before provision for income taxes		(28,125	)		(20,831	)		(81,809	)		(84,990	)
Provision for income taxes		—			—			—			—
Net loss	$	(28,125	)	$	(20,831	)	$	(81,809	)	$	(84,990	)

Comparison of the Three Months Ended September 30, 2020 and 2019

Revenue

	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)
Product	$	6,210	$	18,696	$	(12,486	)
Service		3,758		2,048		1,710
Distribution rights		118		118		—
Total revenue	$	10,086	$	20,862	$	(10,776	)

Total revenue during the three months ended September 30, 2020 decreased by $10.8 million compared to the three months ended September 30, 2019. The decrease was primarily due to a $12.5 million decrease in product revenue, which was offset by a $1.7 million increase in service revenue during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Product Revenue. Product revenue decreased by $12.5 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The decrease was primarily attributable to two fewer MRIdian Linac systems recognized in the three months ended September 30, 2020 as compared to the three months ended September 30, 2019.

Service Revenue. Service revenue increased by $1.7 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to the increase in installed base. The $1.7 million increase includes a $0.2 million release of deferred revenue that was related to MRIdian Linac software upgrades.

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Cost of Revenue

	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)
Product	$	8,550	$	18,521	$	(9,971	)
Service		2,600		1,767		833
Total cost of revenue	$	11,150	$	20,288	$	(9,138	)

Product Cost of Revenue. Product cost of revenue decreased by $10.0 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The decrease was primarily attributable to two fewer MRIdian Linac systems recognized during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Service Cost of Revenue. Service cost of revenue remained relatively flat as compared to the service revenue increase during the three months ended September 30, 2020 compared to the three months ended September 30, 2019, primarily due to a decrease in the cost of service-related inventory parts and coronavirus related reductions in travel and payroll reductions for our service personnel.

Operating Expenses

	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)
Research and development	$	5,245	$	5,641	$	(396	)
Selling and marketing		2,669		7,297		(4,628	)
General and administrative		16,031		19,381		(3,350	)
Total operating expenses	$	23,945	$	32,319	$	(8,374	)

Research and Development. Research and development expenses during the three months ended September 30, 2020 decreased by $0.4 million compared to the three months ended September 30, 2019. The decrease was primarily attributable to a $0.5 million decrease in travel expense attributable to coronavirus related reductions in travel for our research and development workforce.

Selling and Marketing. Selling and marketing expenses during the three months ended September 30, 2020 decreased by $4.6 million compared to the three months ended September 30, 2019. The decrease was primarily attributable to a $2.0 million decrease in personnel expense in the form of sales related compensation and the reduction in workforce, a $1.1 million decrease in travel expense primarily driven by coronavirus related reductions in travel for our sales and marketing workforce, and a $1.1 million decrease in marketing expense primarily driven by the postponement or cancellation of clinical conferences.

General and Administrative. General and administrative expenses during the three months ended September 30, 2020 decreased by $3.4 million compared to the three months ended September 30, 2019. The decrease was primarily attributable to a $1.8 million decrease in travel expense primarily driven by coronavirus related reductions in travel for our general and administrative workforce, a $1.1 million decrease in personnel expense due to the reduction in workforce, and a $0.7 million decrease in consulting and other professional service expense.

Interest Income

	Three Months Ended September 30,
	2020		2019		Change
	(in thousands)
Interest income	$	5	$	484	$	(479	)

Interest income decreased by $0.5 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a strategic shift of invested funds from a high to low yield account.

Interest Expense

	Three Months Ended September 30,
	2020			2019			Change
	(in thousands)
Interest expense	$	(1,074	)	$	(1,069	)	$	(5	)

Interest expense related to the SVB Term Loan remained flat during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.  

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Other (Expense) Income, Net

	Three Months Ended September 30,
	2020			2019		Change
	(in thousands)
Other (expense) income, net	$	(2,047	)	$	11,499	$	(13,546	)

Other (expense) income, net during the three months ended September 30, 2020 consisted primarily of a $2.0 million increase in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants as a result of the increase in the Company’s stock price. Other (expense) income, net during the three months ended September 30, 2019 consisted primarily of a $11.6 million decrease in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants.

Comparison of the Nine Months Ended September 30, 2020 and 2019

Revenue

	Nine Months Ended September 30,
	2020		2019		Change
	(in thousands)
Product	$	28,295	$	65,475	$	(37,180	)
Service		9,909		5,482		4,427
Distribution rights		356		356		—
Total revenue	$	38,560	$	71,313	$	(32,753	)

Total revenue during the nine months ended September 30, 2020 decreased by $32.8 million compared to the nine months ended September 30, 2019. The decrease was primarily due to a $37.2 million decrease in product revenue, offset by a $4.4 million increase in service revenue during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Product Revenue. Product revenue decreased by $37.2 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily attributable to six fewer MRIdian Linac systems recognized in the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. In addition, for the nine months ended September 30, 2019, the Company recognized $0.9 million in revenue from performance obligations satisfied in 2018.

Service Revenue. Service revenue increased by $4.4 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 due to the increase in installed base. The $4.4 million increase includes a $0.5 million release of deferred revenue that was related to a service contract and a $0.2 million release of deferred revenue that was related to MRIdian Linac software upgrades.

Cost of Revenue

	Nine Months Ended September 30,
	2020		2019		Change
	(in thousands)
Product	$	34,393	$	63,368	$	(28,975	)
Service		8,380		9,489		(1,109	)
Total cost of revenue	$	42,773	$	72,857	$	(30,084	)

Product Cost of Revenue. Product cost of revenue decreased by $29.0 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily attributable to six fewer MRIdian Linac systems recognized during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The total cost of revenue in the nine months ended September 30, 2019 was also impacted by approximately $6.9 million of charges, primarily driven by higher than anticipated installation costs related to historical upgrade commitments. The $6.9 million includes $5.5 million of one-time charges and $1.4 million of expenses.

Service Cost of Revenue. Service cost of revenue decreased by $1.1 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to a decrease in the cost of service-related inventory parts and coronavirus related reductions in travel and payroll reductions for our service personnel.

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Operating Expenses

	Nine Months Ended September 30,
	2020		2019		Change
	(in thousands)
Research and development	$	17,793	$	17,135	$	658
Selling and marketing		11,585		19,845		(8,260	)
General and administrative		47,046		49,888		(2,842	)
Total operating expenses	$	76,424	$	86,868	$	(10,444	)

Research and Development. Research and development expenses during the nine months ended September 30, 2020 increased by $0.7 million, compared to the nine months ended September 30, 2019. The increase was primarily attributable to a $0.9 million increase in personnel expense and a $0.6 million increase in depreciation expense, partially offset by a $0.9 million decrease in travel expense primarily driven by coronavirus related reductions in travel for our research and development workforce.

Selling and Marketing. Selling and marketing expenses during the nine months ended September 30, 2020 decreased by $8.3 million, compared to the nine months ended September 30, 2019. This decrease was primarily attributable to a $3.6 million decrease in personnel expense in the form of sales related compensation and the reduction in workforce, a $2.1 million decrease in travel expense primarily driven by coronavirus related reductions in travel for our sales and marketing workforce, a $1.8 million decrease in marketing expense primarily driven by the postponement or cancellation of clinical conferences, and a $0.6 million decrease in professional services.

General and Administrative. General and administrative expenses during the nine months ended September 30, 2020 decreased by $2.8 million, compared to the nine months ended September 30, 2019. This decrease was primarily driven by a $2.7 million decrease in travel expense attributable to coronavirus related reductions in travel for our general and administrative workforce and a $0.6 million decrease in professional services. The decreases were partially offset by a $0.5 million increase in depreciation and amortization expense and a $0.5 million increase in facilities expense.

Interest Income

	Nine Months Ended September 30,
	2020		2019		Change
	(in thousands)
Interest income	$	787	$	1,391	$	(604	)

Interest income decreased by $0.6 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 primarily due to a strategic shift of invested funds from a high to low yield account in 2020.

Interest Expense

	Nine Months Ended September 30,
	2020			2019			Change
	(in thousands)
Interest expense	$	(3,183	)	$	(2,902	)	$	(281	)

Interest expense related to the SVB Term Loan increased by $0.3 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Other (Expense) Income, Net

	Nine Months Ended September 30,
	2020		2019		Change
	(in thousands)
Other (expense) income, net	$	1,224	$	4,933	$	(3,709	)

Other (expense) income, net during the nine months ended September 30, 2020 consisted primarily of a $1.3 million decrease in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants. Other (expense) income, net during the nine months ended September 30, 2019 consisted primarily of a $4.7 million decrease in the fair value of warrant liabilities related to the 2017 and 2016 Placement Warrants.

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Liquidity and Capital Resources

Since our inception in 2004, we have incurred significant net losses and negative cash flows from operations. During the nine months ended September 30, 2020 and 2019, we had net losses of $81.8 million and $85.0 million, respectively. At September 30, 2020 and December 31, 2019, we had an accumulated deficit of $601.0 million and $519.2 million, respectively.

At September 30, 2020 and December 31, 2019, we had cash and cash equivalents of $163.9 million and $226.8 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 December 2019, we raised aggregate gross proceeds of $149.6 million via a public offering, in which we sold approximately 47.8 million shares of our common stock at a price of $3.13 per share. We expect that our existing cash and cash equivalents, together with proceeds from the sales of MRIdian systems, will enable us to conduct our planned operations for at least the next 12 months.

However, the coronavirus pandemic, the resulting recession and its follow-on effects are impacting and will continue to impact our business activities. For further discussion, see the section titled “Impact of the Coronavirus Disease” included above. In the first quarter of 2020, we initiated a contingency plan with the goal to reduce our cash usage by approximately $30 million during the remainder of 2020, largely through reductions in operating expense, working capital and company-wide salary reductions. Regarding company-wide salary reductions, our executive leadership team, including our board of directors, reduced their salaries by as much as 30%, and reductions were then cascaded down at lesser rates through the organization. The company-wide salary reductions remain in effect for our executive leadership team, including our board of directors. However, the reductions at lesser rates for others in our organization were restored in October 2020. In late June 2020, we finalized and communicated a plan to reduce our workforce by approximately 20%. The plan was implemented on July 6, 2020. As of September 30, 2020, we remain on track with our contingency plan to reduce cash usage by approximately $30 million.

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. The shares in the December 2019 Public Offering of Common stock were sold pursuant to the January 2019 registration statement and did not impact the $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 for the fiscal year ended December 31, 2019 and in Part II, Item 1A of this report.

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

	Nine Months Ended September 30,
	2020			2019
Cash used in operating activities	$	(59,680	)	$	(76,632	)
Cash used in investing activities	$	(2,201	)	$	(7,598	)
Cash (used in) provided by financing activities	$	(965	)	$	7,063

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 nine months ended September 30, 2020, cash used in operating activities was $59.7 million, resulting from our net loss of $81.8 million, offset by a $2.4 million net increase in our operating assets and liabilities and by aggregate non-cash charges of $19.8 million.

• Non-cash charges included $17.1 million of stock-based compensation expense, $4.4 million of depreciation and amortization expense, a $1.3 million gain related to the change in fair value of the 2017 and 2016 Placement Warrants, and $1.3 million for the release of historical upgrade commitments.

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• The net change in our operating assets and liabilities was primarily a result of changes in customer deposits and deferred revenue and inventory, which were partially offset by changes in accounts receivable, deferred cost of revenue, and accounts payable. Customer deposits and deferred revenue increased $17.1 million mainly due to timing of revenue recognition milestones and an increase in customer deposits on orders received as compared to the customer deposits relieved from orders achieving revenue recognition during the nine months ended September 30, 2020. Inventory decreased $8.4 million due to our inventory reduction efforts. Accounts receivable increased $9.7 million resulting from timing of billing milestones and collections. Deferred cost of revenue increased $6.9 million due to shipments of systems that have not yet met the requirements of revenue recognition. Accounts payable decreased $6.0 million due to timing of payments.

During the nine months ended September 30, 2019, cash used in operating activities was $76.6 million, as a result of our net loss of $85.0 million, a $9.4 million net change in our operating assets and liabilities, and offset by aggregate non-cash charges of $17.8 million.

• Non-cash charges included $14.4 million of stock-based compensation expense, $3.2 million of depreciation and amortization expense, a $4.7 million gain related to the change in fair value of the 2017 and 2016 Placement Warrants, and $4.4 million for historical upgrade commitments.

• The net change in our operating assets and liabilities was primarily a result of changes in customer deposits and deferred revenue and inventory, which was partially offset by changes in accrued expenses and other liabilities, accounts receivable, deposits on purchased inventory and accounts payable. Inventory increased $10.5 million, in anticipation of upcoming shipments and installations of MRIdian systems. Customer deposits and deferred revenue decreased $14.5 million and deposits on purchased inventory decreased $3.3 million as a result of revenue recognized for the eleven 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 $3.6 million resulting from the timing of collections. Deferred costs decreased by $2.0 million mainly due to the revenue recognized in the first nine months of 2019 offset by the transfer of property and equipment from deferred cost of revenue. Accounts payable increased $1.2 million resulting from the build of inventory and the timing of payments. Accrued expense and other liabilities increased by $4.8 million mainly due to an increase in payroll and related benefits and accrued travel costs.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2020 and 2019 of $2.2 million and $7.6 million, respectively, resulted from capital expenditures to purchase property and equipment.

Financing Activities

During the nine months ended September 30, 2020, financing activities used $1.0 million in cash, consisting primarily of cash used to pay taxes related to net share settlement of equity awards of $0.8 million.

During the nine months ended September 30, 2019, financing activities provided $7.1 million in cash, consisting primarily of $9.6 million from the exercise of stock options, partially offset by cash used to pay taxes related to net share settlement of equity awards of $2.4 million.

SVB Term Loan

In December 2018, we 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 $215.0 million from January 1, 2019 to December 1, 2020 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.

On December 31, 2019, we entered into the First Amendment (the First Amendment) to the SVB Term Loan. The First Amendment, among other things, amended the SVB Term Loan to (i) suspend testing of the minimum revenue financial covenant for the fiscal quarter ended December 31, 2019, (ii) provide for the minimum trailing twelve-month revenue thresholds under the minimum revenue financial covenant for periods ending on the last day of fiscal quarters in fiscal years subsequent to 2020 to be determined annually at the greater of (a) a 25% cushion to revenue forecasts provided by the Company to SVB and (b) 10% year-over-year annual growth, unless otherwise agreed, (iii) increase the minimum liquidity ratio financial covenant from 1.50:1.00 to 1.75:1.00 and (iv) increase the prepayment premium from 1.00% to 2.00% for amounts prepaid under the SVB Term Loan prior to the maturity date thereof, subject to certain exceptions. On October 30, 2020, the Company entered into the Second Amendment (the Second Amendment) to the SVB Term Loan. Refer to Note 14, Subsequent Events.

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 does include all accounts and proceeds of such intellectual property.

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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 September 30, 2020.

Off-Balance Sheet Arrangements and Contractual Obligations

We did not have any off-balance sheet arrangements as of September 30, 2020 and December 31, 2019. 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 12, 2020.

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 conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses. We evaluate our estimates and assumptions on an ongoing basis. Our estimates and assumptions are based on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no significant changes to our accounting policies during the nine months ended September 30, 2020, as compared to the critical accounting policies described in our Annual Report on Form 10-K filed with the SEC on March 12, 2020. 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.

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 September 30, 2020, 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 third quarter of 2020 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

Patent Litigation

On September 10, 2019, a complaint for patent infringement was filed by Varian Medical Systems, Inc., in U.S. District Court for the Northern District of California against the Company. Captioned Varian Medical Systems, Inc., v. ViewRay, Inc., the complaint alleges that the Company infringes two related patents, U.S. Patent Nos. 8,637,841 and 9,082,520 and seeks injunctive relief and monetary damages. The Company filed its answer on November 1, 2019. The District Court matter was stayed on October 23, effective through December 7, 2020. We believe the allegations in the complaint are without merit and intend to vigorously defend the litigation.

On July 7, 2020 and July 31, 2020, the Company filed a petition with the Patent Trial & Appeal Board of the United States Patent and Trademark Office (PTAB), requesting institution of inter partes review (IPR) and cancellation of claims 1-3, 5-8, 10, 13, 14 of Varian’s U.S. Patent No. 9,082,520. On August 13, 2020, the Company filed a separate petition with the PTAB, requesting an IPR and cancellation of claims 1-4 and 20-22 of Varian’s U.S. Patent No. 8,637,841.

Class Action Litigation

On September 13, 2019, a class action complaint for violation of federal securities laws was filed in U.S. District Court for the Northern District of Ohio against the Company, its chief executive officer, chief scientific officer, and former chief financial officer. On December 19, 2019, the court appointed Plymouth County Retirement Association as the lead plaintiff, and on February 28, 2020 the lead plaintiff filed an amended complaint asserting securities fraud claims against the Company, its chief executive officer, chief operating officer, chief scientific officer, and former chief executive officer and former chief financial officer. Now captioned Plymouth County Retirement Association v. ViewRay, Inc., et al., the amended complaint alleges that the Company violated federal securities laws by issuing materially false and misleading statements that failed to disclose adverse facts concerning the its business, operations, and financial results, and seeks damages, interest, and other relief. We filed a motion to dismiss the amended complaint on May 28, 2020. While the initial motion to dismiss was pending, the plaintiff was granted leave to file a second amended complaint. A motion to dismiss the second amended complaint was filed on September 16, 2020, and that motion has been fully briefed. We believe the allegations in the complaint are without merit and intend to vigorously defend the litigation.

Stockholder Derivative Lawsuit

On July 22, 2020, a stockholder derivative lawsuit was filed against ViewRay (as a nominal defendant) and certain of its current and former officers and directors in the U.S. District Court for the Northern District of Ohio. This action alleges, purportedly on behalf of ViewRay, that the officers and directors violated Section 14(a) of the Securities Exchange Act of 1934, breached their fiduciary duties, wasted corporate assets, and were unjustly enriched based on factual assertions substantially similar to those in the class action complaint described above. The complaint seeks, among other things, damages awarded to ViewRay, restitution and disgorgement of profits in an unspecified amount, and corporate reforms. Due to the overlap between the allegations in the derivative complaint and those in the putative securities class action complaint, this lawsuit is stayed until December 3, 2020, pending a decision on the motion to dismiss the second amended complaint in the securities action.

Given the early stage of each of the litigation matters described above, at this time we are unable to reasonably estimate possible losses or form a judgment that an unfavorable outcome is either probable or remote. However, litigation is subject to inherent uncertainties, and one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect in 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.

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Item 1A. Risk Factors

Except with respect to the risk factor set forth below, 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, 2019 and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. If any of the risks discussed in our Annual Report on Form 10-K or below are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Risks Related to Our Business and Strategy

The coronavirus disease has been declared a pandemic by the World Health Organization, has spread to many parts of the world, and has and will continue to adversely affect our business operations and financial condition.

The coronavirus disease has been declared a pandemic by the World Health Organization, or WHO, and has spread to many parts of the world and has and will continue to adversely affect our business operations and financial condition. The outbreak continues to grow globally and government and private sector responsive actions have and will continue to adversely affect our business operations. It is impossible to predict the effect and potential spread of the coronavirus globally.

Should the coronavirus continue to spread, our business plans will be further materially delayed or interrupted. Our sales and revenue cycles, including MRIdian orders, deliveries and installation, as well as our other business operations, are likely to be significantly delayed as we experience adverse impacts, including but not limited to adverse impacts affecting our teammates, global supply chain partners, transportation service providers, and customers. For example, along with delays in service from our global supply chain partners, we have experienced delays in installation of systems in the United States, Asia and Europe due to the restrictions imposed by government agencies and our customers in response to the spread of coronavirus. Similarly, our ability to conduct commercial efforts with our customers have been and are likely to continue to be disrupted as customers have suspended in-person sales calls and turned their focus to dealing with the impact of coronavirus on their operations. In the first quarter of 2020, we initiated a contingency plan with the goal to reduce our cash usage by approximately $30 million during the remainder of 2020, largely through reductions in operating expense, working capital and company-wide salary reductions. The company-wide salary reductions remain in effect for our executive leadership team, including our board of directors. However, the reductions at lesser rates for others in our organization were restored in October 2020. In addition, on July 6, 2020, we reduced our workforce by approximately 20%. However, if our business operations continue to be adversely impacted by the spread of coronavirus, our costs associated with operating our business could be significantly higher than planned, which may have a material impact on our business. The coronavirus could also further adversely impact our teammate population, as well as our near-term and long-term revenues, earnings and cash flow and may require significant additional expenditures to mitigate such impacts.

Should the global recession persist as a result of the impact of coronavirus, our ability to conduct our business and to access capital markets will be negatively impacted; and capital equipment sales, which make up the majority of our revenue, may take longer than other areas of the economy in a recovery, which may have a material impact on our business. The coronavirus pandemic continues to develop rapidly, and its continued global economic impact may negatively impact our operations in areas that we are not aware of currently.

If third-party payors do not provide coverage and adequate payment to our customers, it could negatively impact sales of MRIdian.

In the United States, hospitals and other healthcare providers who purchase MRIdian generally rely on third-party payors to reimburse all or part of the costs and fees associated with the treatments performed with our system. Accordingly, sales of MRIdian depend, in part, on whether coverage and adequate payment for radiation oncology services are available to our customers from third-party payors, such as government healthcare insurance programs, including the Medicare and Medicaid programs, and private insurance plans.  In general, third-party payors in the United States have become increasingly cost-conscious, which has limited coverage and payment for certain procedures including MR Image-Guided radiation therapy. Third-party payors have also increased utilization controls related to the use of products such as ours by healthcare providers.

Furthermore, there are no uniform coverage and payment policies for MR Image-Guided radiation therapy among third-party payors. Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments that include the use of MRIdian.

The Medicare program is used as a model by many private payors and other governmental payors to develop their coverage and payment policies for medical services and procedures. Medicare coverage of advanced and conventional radiation therapies using MRIdian currently varies depending upon the geographic location in which the services are provided. The Centers for Medicare & Medicaid Services, or CMS, has not adopted national coverage determination for such therapies that would determine coverage nationally. In the absence of a national coverage determination, Medicare Administrative Contractors, or MACs, with jurisdiction over specific geographic regions have the discretion to determine whether and when the use of MR Image-Guided radiation therapy will be considered medically necessary and covered in their respective regions. A number of MACs have adopted or proposed local coverage determinations covering radiation therapy. However, these local coverage determinations do not ensure that coverage will be available for MR Image-Guided radiation therapy for all types of cancer, because the coverage policies may limit coverage to only certain types of cancer.

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Even if MR Image-Guided radiation therapy is covered and paid by third-party payors, adverse changes in payors’ coverage and payment policies that affect MRIdian could harm our ability to market and sell MRIdian. We cannot be sure that third-party payors will pay our customers for procedures using MRIdian at levels that will enable us to achieve or maintain adequate sales and price levels for MRIdian. Without coverage and adequate payment from third-party payors, the market for MRIdian may be limited.

Third-party payors regularly update payment amounts and, from time to time, revise the methodologies used to determine payment amounts. This includes annual updates to payments to physicians, hospitals and free-standing radiation centers for radiation treatments performed with MRIdian. Generally, because the cost of MRIdian is recovered by the healthcare provider as part of the payment for performing the treatment and not separately paid, these updates could directly affect the demand for MRIdian. An example of payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using prescribed statutory formulas.

Third-party payors are incentivizing value-based health care by moving away from fee-for-service payment systems to alternative payment models that pay providers based on an episode of care. Under such models, providers are paid a prospectively determined payment amount per episode and must furnish all medically necessary services to treat the patient. Providers may enter into risk-share arrangements with payors under such models. An example of such a model is Medicare’s July 2019 proposal to implement a Radiation Oncology Alternative Payment Model, or RO APM. While the exact timetable for implementation is not clear as of the date of this Quarterly Report on Form 10-Q, we and other radiation oncology community stakeholders expect implementation to occur sometime in 2021. On September 18, 2020, CMS issued a final rule on the RO APM with a January 1, 2021 implementation date. However, on October 21, 2020, the CMS Administrator announced that CMS would start rulemaking processes to delay implementation of the RO Model to July 1, 2021. The implementation of the RO APM could affect the demand for MRIdian. Demand can also change as CMS makes changes to the RO APM model in later years as well as if other third-party payors adopt similar models.

Any significant changes, or proposed changes, in payment rates or payment methodologies for radiation therapy or MR Image-Guided therapy specifically, could further increase uncertainty, influence our customers’ decisions, reduce demand for MRIdian, cause customers to cancel orders and affect our revenue and harm our business.

Foreign governments also have their own healthcare payment systems, which vary significantly by country and region, and we cannot be sure that adequate payments will be made available to customers in those countries with respect to MRIdian under any such foreign health care financing and delivery systems.

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	Separation Agreement, dated July 28, 2020, by and between ViewRay Inc. and Shahriar Matin.	8-K	10.1	7/30/20
10.2*†	Agreement made as of October 1, 2020, by and among ViewRay Technologies, Inc., ViewRay, Inc. and Siemens Healthcare GmbH.	8-K	10.1	10/7/20
10.3	Second Amendment dated as of October 30, 2020 to Loan and Security Agreement, by and among ViewRay, Inc., ViewRay Technologies, Inc. and Silicon Valley Bank.	8-K	10.1	11/5/20
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.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.				X
101.SCH	Inline XBRL Taxonomy Extension Schema Document				X
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document				X
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document				X
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document				X
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document				X
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)				X

* Certain identified information has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the Company if publicly disclosed.

† Portions of this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish to the Securities and Exchange Commission a copy of any omitted portions of the exhibit upon request.

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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: November 6, 2020	By:	/s/ Scott Drake
	Name:	Scott Drake
	Title:	Chief Executive Officer
		(Principal Executive Officer)
Dated: November 6, 2020	By:	/s/ Zachary Stassen
	Name:	Zachary Stassen
	Title:	Chief Financial Officer
		(Principal Financial Officer)

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