Attached files
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EX-32.2 - EXHIBIT 32.2 - TomoTherapy Inc | c00431exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - TomoTherapy Inc | c00431exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - TomoTherapy Inc | c00431exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - TomoTherapy Inc | c00431exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | 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: 001-33452
TomoTherapy Incorporated
(Exact name of registrant as specified in its charter)
Wisconsin (State or other jurisdiction of incorporation or organization) |
39-1914727 (I.R.S. Employer Identification No.) |
|
1240 Deming Way, Madison, Wisconsin (Address of principal executive offices) |
53717 (Zip Code) |
(608) 824-2800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
NO CHANGE
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
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 and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding as of April 30, 2010: 54,104,162 shares.
TomoTherapy Incorporated and Subsidiaries
Index
Index
Page | ||||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
17 | ||||||||
26 | ||||||||
26 | ||||||||
27 | ||||||||
27 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
30 | ||||||||
31 | ||||||||
32 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
(In thousands, except share amounts)
(unaudited)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Cash and cash equivalents (CPAC balances of $6,300 and $1,590, respectively) |
$ | 92,071 | $ | 76,108 | ||||
Short-term investments |
56,632 | 78,225 | ||||||
Receivables, net |
33,660 | 33,559 | ||||||
Inventories, net |
53,555 | 47,669 | ||||||
Prepaid expenses and other current assets (CPAC balances of $939 and $494,
respectively) |
4,326 | 3,633 | ||||||
Total current assets |
240,244 | 239,194 | ||||||
Property and equipment, net (CPAC balances of $1,152 and $555, respectively) |
18,383 | 18,628 | ||||||
Other non-current assets, net (CPAC balances of $25 and $30, respectively) |
11,582 | 12,429 | ||||||
TOTAL ASSETS |
$ | 270,209 | $ | 270,251 | ||||
LIABILITIES AND EQUITY |
||||||||
Accounts payable (CPAC balances of $443 and $24, respectively) |
$ | 11,812 | $ | 6,269 | ||||
Accrued expenses (CPAC balances of $62 and $20, respectively) |
17,384 | 19,588 | ||||||
Accrued warranty |
3,579 | 4,173 | ||||||
Deferred revenue |
32,780 | 34,145 | ||||||
Customer deposits |
10,567 | 13,266 | ||||||
Total current liabilities |
76,122 | 77,441 | ||||||
Other non-current liabilities (CPAC balances of $19 and $18, respectively) |
3,995 | 5,475 | ||||||
TOTAL LIABILITIES |
80,117 | 82,916 | ||||||
COMMITMENTS AND CONTINGENCIES (Note G) |
||||||||
Preferred stock, $1 per share par value, 10,000,000 shares authorized at March
31, 2010 and
December 31, 2009; no shares issued and outstanding at March 31, 2010 and
December 31, 2009 |
| | ||||||
Common stock, $0.01 per share par value, 200,000,000 shares authorized at
March 31, 2010 and
December 31, 2009; 54,144,133 and 54,102,360 shares issued and outstanding
at March 31, 2010 and
53,980,728 and 53,938,955 shares issued and outstanding at December 31, 2009 |
517 | 515 | ||||||
Additional paid-in capital |
669,567 | 667,177 | ||||||
Treasury stock, 41,773 shares at cost at March 31, 2010 and December 31, 2009 |
(137 | ) | (137 | ) | ||||
Accumulated other comprehensive loss |
(575 | ) | (268 | ) | ||||
Accumulated deficit |
(488,541 | ) | (483,863 | ) | ||||
Total shareholders equity |
180,831 | 183,424 | ||||||
Noncontrolling interests |
9,261 | 3,911 | ||||||
TOTAL EQUITY |
190,092 | 187,335 | ||||||
TOTAL LIABILITIES AND EQUITY |
$ | 270,209 | $ | 270,251 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
(In thousands, except per share amounts)
(unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
Product |
$ | 29,229 | $ | 21,133 | ||||
Service and other |
12,851 | 9,490 | ||||||
Total revenue |
42,080 | 30,623 | ||||||
Cost of revenue: |
||||||||
Product |
12,785 | 11,745 | ||||||
Service and other |
16,691 | 16,339 | ||||||
Total cost of revenue |
29,476 | 28,084 | ||||||
Gross profit |
12,604 | 2,539 | ||||||
Operating expenses: |
||||||||
Research and development |
7,540 | 5,849 | ||||||
Selling, general and administrative |
11,034 | 10,652 | ||||||
Total operating expenses |
18,574 | 16,501 | ||||||
Loss from operations |
(5,970 | ) | (13,962 | ) | ||||
Other income (expense): |
||||||||
Interest income |
531 | 697 | ||||||
Interest expense |
(11 | ) | (14 | ) | ||||
Other expense, net |
(448 | ) | (256 | ) | ||||
Total other income |
72 | 427 | ||||||
Loss before income tax |
(5,898 | ) | (13,535 | ) | ||||
Income tax benefit |
44 | 100 | ||||||
Net loss |
(5,854 | ) | (13,435 | ) | ||||
Noncontrolling interests |
1,176 | 436 | ||||||
Net loss attributable to shareholders |
$ | (4,678 | ) | $ | (12,999 | ) | ||
Weighted-average common shares outstanding
basic and diluted |
51,566 | 50,592 | ||||||
Loss per common share basic and diluted |
$ | (0.09 | ) | $ | (0.26 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(In thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (5,854 | ) | $ | (13,435 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,503 | 2,422 | ||||||
Share-based compensation |
1,819 | 1,490 | ||||||
Deferred income tax benefit |
(72 | ) | (172 | ) | ||||
Other noncash items |
2 | 16 | ||||||
Changes in operating assets and liabilities: |
||||||||
Receivables, net |
(181 | ) | 8,480 | |||||
Inventories, net |
(6,136 | ) | (783 | ) | ||||
Other assets |
(1,109 | ) | (666 | ) | ||||
Accounts payable |
5,548 | 3,278 | ||||||
Accrued expenses |
(2,348 | ) | (2,063 | ) | ||||
Accrued warranty |
(594 | ) | (1,598 | ) | ||||
Deferred revenue |
(1,950 | ) | 2,158 | |||||
Customer deposits |
(2,699 | ) | (752 | ) | ||||
Net cash used in operating activities |
(11,071 | ) | (1,625 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,239 | ) | (1,170 | ) | ||||
Purchases of short-term investments |
| (7,499 | ) | |||||
Proceeds from sales and maturities of short-term investments |
21,250 | 4,876 | ||||||
Other investing activities |
(241 | ) | (922 | ) | ||||
Net cash provided by (used in) investing activities |
19,770 | (4,715 | ) | |||||
Cash flows from financing activities: |
||||||||
Payments on notes payable |
(34 | ) | (35 | ) | ||||
Proceeds from exercises of stock options and warrants |
573 | 2 | ||||||
Proceeds from issuance of CPAC common stock |
6,526 | 6,364 | ||||||
Net cash provided by financing activities |
7,065 | 6,331 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
199 | 671 | ||||||
Increase in cash and cash equivalents |
15,963 | 662 | ||||||
Cash and cash equivalents at beginning of period |
76,108 | 65,967 | ||||||
Cash and cash equivalents at end of period |
$ | 92,071 | $ | 66,629 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(unaudited)
(In thousands)
(unaudited)
Shareholders Equity | ||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common | Paid-in | Treasury | Comprehensive | Accumulated | Noncontrolling | |||||||||||||||||||||||
Stock | Capital | Stock | Income (Loss) | Deficit | Interests | Total Equity | ||||||||||||||||||||||
(As adjusted, | ||||||||||||||||||||||||||||
Note B) | ||||||||||||||||||||||||||||
Balance at December 31, 2008 |
$ | 506 | $ | 659,379 | $ | | $ | 202 | $ | (446,493 | ) | $ | 2,155 | $ | 215,749 | |||||||||||||
Net loss |
| | | | (12,999 | ) | (436 | ) | (13,435 | ) | ||||||||||||||||||
Other comprehensive loss |
| | | (428 | ) | | | (428 | ) | |||||||||||||||||||
Comprehensive loss |
(13,863 | ) | ||||||||||||||||||||||||||
Issuance of common stock |
| | | | | 6,364 | 6,364 | |||||||||||||||||||||
Exercise of stock options and
common stock warrants |
| 2 | | | | | 2 | |||||||||||||||||||||
Share-based compensation expense |
| 1,490 | | | | | 1,490 | |||||||||||||||||||||
Balance at March 31, 2009 |
$ | 506 | $ | 660,871 | $ | | $ | (226 | ) | $ | (459,492 | ) | $ | 8,083 | $ | 209,742 | ||||||||||||
Balance at December 31, 2009 |
$ | 515 | $ | 667,177 | $ | (137 | ) | $ | (268 | ) | $ | (483,863 | ) | $ | 3,911 | $ | 187,335 | |||||||||||
Net loss |
| | | | (4,678 | ) | (1,176 | ) | (5,854 | ) | ||||||||||||||||||
Other comprehensive loss |
| | | (307 | ) | | | (307 | ) | |||||||||||||||||||
Comprehensive loss |
(6,161 | ) | ||||||||||||||||||||||||||
Issuance of common stock |
| | | | | 6,526 | 6,526 | |||||||||||||||||||||
Exercise of stock options |
2 | 571 | | | | | 573 | |||||||||||||||||||||
Share-based compensation expense |
| 1,819 | | | | | 1,819 | |||||||||||||||||||||
Balance at March 31, 2010 |
$ | 517 | $ | 669,567 | $ | (137 | ) | $ | (575 | ) | $ | (488,541 | ) | $ | 9,261 | $ | 190,092 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated statements.
6
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
NOTE A DESCRIPTION OF BUSINESS
Organization
The organization is comprised of TomoTherapy Incorporated, a Wisconsin corporation (Tomo), its
wholly-owned subsidiaries and its minority-owned affiliate (collectively, together with Tomo, the
Company). Tomo and its wholly-owned subsidiaries (TomoTherapy) develop, manufacture, market and
sell advanced radiation therapy solutions to treat a wide range of cancer types. The treatment
systems in the Companys platform (collectively, the System or Systems) include: (1) the flagship
Hi Art treatment system, which delivers CT-guided, helical intensity-modulated radiation therapy
(IMRT) treatment fractions, (2) the TomoHD treatment system, which includes both the TomoHelical
and TomoDirect treatment modalities, and (3) the TomoMobile treatment system, which is a
relocatable radiation therapy solution. TomoTherapy markets and sells its products to hospitals and
cancer treatment centers in North America, Europe, the Middle East and Asia-Pacific. Compact
Particle Acceleration Corporation (CPAC), Tomos controlled, minority-owned affiliate, is an
enterprise focused on the development of a proton therapy system.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Companys condensed consolidated financial statements include the accounts of CPAC.
Although Tomos ownership in CPAC is less than 50%, it has consolidated CPAC, as Tomo is the
primary beneficiary of CPAC, due to its overall control of CPACs activities and Tomos ownership
interest in CPAC. Therefore, CPACs outside stockholders interests are shown in the Companys
condensed consolidated financial statements as Non-controlling interests. Significant
intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the United States of
America (U.S. GAAP) and pursuant to the accounting and disclosure rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and disclosures normally included in
the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or
omitted pursuant to such rules and regulations. Accordingly, these condensed consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in the Companys Annual Report for the year ended
December 31, 2009 as filed with the SEC on Form 10-K. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included. Interim results are not necessarily indicative of results that
may be expected for the year ending December 31, 2010.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities, at the date of the condensed consolidated
financial statements and the reported amount of revenues and expenses and cash flows during the
periods presented. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Companys financial instruments consist primarily of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and long-term debt. The carrying value of these
assets and liabilities approximate their respective fair values as of March 31, 2010 and December
31, 2009.
7
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Revenue Recognition
In September 2009, the Financial Accounting Standards Board (FASB) amended the accounting
guidance on revenue recognition. Under the amended guidance, consideration in a multiple element
arrangement may now be allocated in a manner that more closely reflects the structure of the
transaction (new revenue guidance). Also, under the new revenue guidance, tangible products that
contain software components essential to the functionality of the tangible product will no longer
be subject to software revenue recognition guidance and will now be subject to other revenue
guidance.
The Company elected to early adopt this new revenue guidance at the beginning of its first
quarter of fiscal 2010 on a prospective basis for applicable arrangements originating or materially
modified on or after January 1, 2010. For the first quarter of 2010, adoption of the new revenue
guidance did not have a material impact on its condensed consolidated financial statements and the
Company does not expect the new revenue guidance will have a material impact on its consolidated
financial statements in future periods.
The Company recognizes revenue from System sales, including sales to distributors, and related
services, when earned. Revenue is recognized when the following criteria are met: persuasive
evidence of an arrangement exists, title and risk of loss have been transferred to the customer,
the sales price is fixed or determinable and collection is reasonably assured.
Payments received for products prior to shipment are recorded as customer deposits. Once a
System has been shipped, the related deposits are transferred to deferred revenue until the
criteria for revenue recognition are satisfied.
The Company recognizes revenue in connection with distributor sales of the System based on the
distributors certification status. If a distributor is certified by the Company to provide
installation, testing, training and post-installation warranty services to end customers, the
Company recognizes revenue upon shipment to that certified distributor, at which time the Companys
only remaining obligation is its post-installation warranty services to the distributor. The
Company recognizes revenue for direct sales and sales through distributors that are not certified
upon receipt of the signed acceptance procedure document from the end customer. Distributors do
not have any contractual right of return, and the Company has not accepted any System returns from
any distributor.
The Company frequently enters into sales arrangements with customers that contain multiple
elements or deliverables such as hardware and post-warranty maintenance services. For such
arrangements, the Company allocates revenue to all deliverables based on their relative selling
prices. In such circumstances, the new revenue guidance establishes a hierarchy to determine the
selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific
objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and
(iii) best estimate of the selling price (ESP). Under previous guidance, in instances when
evidence of VSOE of all undelivered elements exists, evidence does not exist for one or more
delivered elements and the fair value of all of the undelivered elements is less than the
arrangement fee, revenue is recognized using the residual method. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee
is recognized as revenue. The residual method of accounting for revenue from multiple element
arrangements is no longer permitted for transactions subject to the new revenue guidance.
Payments received for post-warranty maintenance services on the System are recorded as
deferred revenue upon receipt and are recognized as revenue ratably over the term of the contract,
which generally ranges from twelve to sixty months.
The Company sells optional software packages for which the selling price, cost and
functionality are incidental to the operation of the System itself. The Company recognizes revenue
for these optional software packages when all of the following criteria are met: persuasive
evidence of an arrangement exists, the fee is fixed or determinable, collection of the related
receivable is reasonably assured and delivery of the product has occurred, provided that all other
criteria for revenue recognition have been met. Revenue earned on software arrangements involving
multiple elements is allocated to each element using the hierarchy in the new revenue guidance.
The Company records all revenue net of any governmental taxes.
Capitalized Software Development Costs
Software development costs incurred prior to the establishment of technological
feasibility are expensed when incurred and are included in research and development expense.
Technological feasibility is evaluated for each software version developed and can occur early or
later in the development cycle depending on the nature of the development project. Once the
software has reached technological feasibility, all subsequent software development costs are
capitalized until that software is released for sale. After the software is released for sale, the
capitalized software development cost is amortized over the softwares useful life, and the related
expense is charged to cost of revenue. The Company reviews its capitalized software development
costs for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
8
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Share-Based Compensation
Share-based compensation to employees, including grants of employee stock options and stock
sold pursuant to employee stock purchase plans, is measured at fair value and expensed in the
condensed consolidated statements of operations over the service period of the grant, which is
generally the vesting period. The Company uses the Black-Scholes option-pricing model to value
stock options. The Company uses historical stock prices of a peer group of companies as the basis
for its volatility assumptions. The assumed risk-free rates are based on U.S. Treasury rates in
effect at the time of grant with a term consistent with the expected option lives. The Company
employs the plain-vanilla method of estimating the expected term of the options, as the Company
does not have significant historical experience. The forfeiture rate is based on past history of
forfeited options. The expected dividend yield is based on the Companys history of not paying
dividends. The Company continues to account for options issued prior to January 1, 2006 under an
intrinsic value method.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences of
temporary differences between the financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if, based upon managements estimates, it
is more likely than not that a portion or all of the net deferred tax assets will not be realized.
The factors used to assess the likelihood of realization are primarily the forecast of future
taxable income and the remaining time period to utilize any tax operating losses and tax credits.
The Companys practice for accounting for uncertainty in income taxes is to recognize the
financial statement benefit of a tax position only after determining that the relevant tax
authority would more likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not criteria, the amount recognized in the financial statements is the
largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. The unrecognized tax benefits relate primarily to
federal and state research tax credits.
Recent Accounting Pronouncements
In September 2006, the FASB issued new accounting guidance on fair value measurements and
disclosures. The new guidance defines fair value, establishes a framework for measuring fair value
under U.S. GAAP and enhances disclosures about fair value measurements. In February 2008, the FASB
issued further guidance, which provided a one year deferral of the effective date for non-financial
assets and non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. This guidance applies under other accounting
pronouncements that require or permit fair value measurements, as the FASB previously concluded in
those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this guidance does not require any new fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years. The adoption of the new guidance in 2008 and the
further guidance in 2009 did not have a material impact on the Companys condensed consolidated
financial statements.
In June 2009, the FASB issued revised guidance for the accounting of variable interest
entities. This revised guidance replaces the quantitative-based risks and rewards approach with a
qualitative approach that focuses on identifying which enterprise has the power to direct the
activities of a variable interest entity that most significantly impact the entitys economic
performance and has the obligation to absorb losses or the right to receive benefits from the
entity that could be potentially significant to the variable interest entity. The accounting
guidance also requires an ongoing reassessment of whether an enterprise is the primary beneficiary
and requires additional disclosures about an enterprises involvement in variable interest
entities. The adoption of this accounting guidance, which became effective for the Company
beginning in the first quarter of fiscal 2010, did not have a material impact on the Companys
condensed consolidated financial statements.
NOTE C SUPPLEMENTAL FINANCIAL INFORMATION
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The carrying value of these investments approximates their fair
value.
9
Table of Contents
TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Short-term Investments
Investments with original maturities of greater than three months and remaining maturities of
less than one year are classified as short-term investments. Investments with maturities beyond
one year may be classified as short-term if they are highly liquid, as such securities represent
the investment of cash that is available for current operations. All short-term investments are
classified as available for sale and are recorded at fair value using the specific identification
method. Unrealized changes in fair value, net of tax, are reflected in the condensed consolidated
financial statements as Other comprehensive income (loss).
Investments consisted of the following (in thousands):
March 31, 2010 | ||||||||||||||||
Cost basis | Unrealized gains | Unrealized losses | Fair value | |||||||||||||
U.S. Government and Agency securities |
$ | 43,456 | $ | 813 | $ | | $ | 44,269 | ||||||||
Corporate bonds |
12,099 | 264 | | 12,363 | ||||||||||||
$ | 55,555 | $ | 1,077 | $ | | $ | 56,632 | |||||||||
December 31, 2009 | ||||||||||||||||
Cost basis | Unrealized gains | Unrealized losses | Fair value | |||||||||||||
U.S. Government and Agency securities |
$ | 60,531 | $ | 1,043 | $ | | $ | 61,574 | ||||||||
Corporate bonds |
16,334 | 317 | | 16,651 | ||||||||||||
$ | 76,865 | $ | 1,360 | $ | | $ | 78,225 | |||||||||
The remaining maturities of debt securities were as follows (in thousands):
March 31, 2010 | December 31, 2009 | |||||||||||||||
Cost basis | Fair value | Cost basis | Fair value | |||||||||||||
Due in one year or less |
$ | 30,817 | $ | 31,124 | $ | 48,345 | $ | 48,809 | ||||||||
Due after one year through five years |
24,738 | 25,508 | 28,520 | 29,416 | ||||||||||||
$ | 55,555 | $ | 56,632 | $ | 76,865 | $ | 78,225 | |||||||||
The Company determines the fair value of its investments using a fair value hierarchy
based on three levels of inputs, of which the first two are considered observable and the last
unobservable, as follows:
| Level 1 Quoted prices in active markets for identical assets or liabilities. |
| Level 2 Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities. |
| Level 3 Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities. |
As of March 31, 2010, the Companys financial assets, which consist of its investments, were
measured at fair value employing Level 2 inputs.
Receivables, net
The Companys receivables are mainly due from hospitals and cancer treatment centers. Credit
is extended based on the Companys evaluation of a customers financial condition, and collateral
is not generally required. Accounts receivable are due in accordance with contract terms and are
considered past due if not paid within 30 days of contract terms. In addition, the Company
frequently enters into sales contracts for the System that require advance payments from customers.
The Companys allowance for doubtful accounts reflects its best estimate of probable losses
inherent in its accounts receivable balance. The Company determines the allowance based on known
troubled accounts, historical experience and other available evidence. The Companys allowance for
doubtful accounts at March 31, 2010 and December 31, 2009 was $0.8 million and $0.7 million,
respectively.
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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Inventories, net
Components of inventory include raw materials, work-in-process and finished goods. Finished
goods include in-transit Systems that have been shipped to the Companys customers or non-certified
distributors, but are not yet installed and accepted by the end customer. All inventories are
stated at the lower of cost or market, with cost determined by the first-in, first-out method. The
Company reduces the carrying value of its inventories for differences between the cost and
estimated net realizable value, taking into consideration usage in the preceding twelve months,
expected demand, technological obsolescence and other information. The Company records as a charge
to cost of revenue the amount required to reduce the carrying value of inventory to net realizable
value. As of March 31, 2010 and December 31, 2009, the Company had an inventory reserve of $5.0
million and $5.1 million, respectively, which is primarily related to service spare parts
inventory. In addition, costs associated with the procurement and warehousing of inventories, such
as inbound freight charges and purchasing and receiving costs, are included in the cost of revenue
line item within the statements of operations.
Net inventories consisted of the following (in thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Raw materials |
$ | 41,490 | $ | 40,091 | ||||
Work-in-process |
4,843 | 1,847 | ||||||
Finished goods |
7,222 | 5,731 | ||||||
$ | 53,555 | $ | 47,669 | |||||
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Commissions, severance and payroll-related |
$ | 3,184 | $ | 4,531 | ||||
Bonuses |
1,077 | 1,705 | ||||||
Accrued distributor relation costs |
5,318 | 5,188 | ||||||
Sales, use and other indirect taxes |
2,838 | 3,450 | ||||||
Other |
4,967 | 4,714 | ||||||
$ | 17,384 | $ | 19,588 | |||||
Accrued Warranty
The Companys sales terms include a warranty that generally covers the first year of System
operation and is based on terms that are generally accepted in the marketplace. The Company
records a current liability for the expected cost of warranty-related claims at the time of sale.
The following table presents changes in the Companys product warranty accrual for the three
months ended March 31, 2010 and 2009 (in thousands):
March 31, | March 31, | |||||||
2010 | 2009 | |||||||
Balance, beginning of period |
$ | 4,173 | $ | 7,431 | ||||
Charged to cost of revenue |
1,260 | 1,341 | ||||||
Adjustments related to change in estimate |
(373 | ) | (780 | ) | ||||
Actual product warranty expenditures |
(1,481 | ) | (2,159 | ) | ||||
Balance, end of period |
$ | 3,579 | $ | 5,833 | ||||
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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Deferred Revenue
Deferred revenue is recorded on a gross basis with the corresponding costs of revenue residing
in inventory until such revenue is recognized. Deferred revenue includes amounts primarily related
to services and, to a lesser extent, amounts related to product sales, including in-transit Systems
that have shipped to the Companys direct customers or non-certified distributors, but are not yet
installed and accepted by the end customer. The Company ultimately expects to recognize these
amounts as revenue upon performance of the services or once the Companys product has been
delivered and accepted by the customer.
The costs of revenue associated with services primarily relate to spare parts inventory along
with the direct labor charges corresponding to post-warranty maintenance, which are recognized as
incurred over the term of the service contract. The costs of revenue associated with product sales
are comprised primarily of finished goods inventory, along with the corresponding installation
costs, which are recognized as incurred once the product has been accepted by the customer.
Deferred revenue with expected recognition dates of greater than one year is classified in the
consolidated financial statements as Other non-current liabilities. As of March 31, 2010 and
December 31, 2009, the Companys non-current deferred revenue was $2.1 million and $2.7 million,
respectively.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenue, expenses, gains and losses that, under
U.S. GAAP, are included in other comprehensive income (loss), but are excluded from net income
(loss), as these amounts are recorded directly as an adjustment to shareholders equity, net of
tax, when applicable. The Company had other comprehensive loss of $0.3 million and $0.4 million
for the three months ended March 31, 2010 and 2009, respectively.
NOTE D LOSS PER COMMON SHARE
The Company calculates its loss per common share using the two-class method. The two-class
method is an earnings allocation formula that determines earnings per share for each class of
common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under that method,
income from continuing operations (or net income) is reduced by the amount of dividends declared in
the current period for each class of stock and by the contractual amount of dividends (or interest
on participating income bonds) that must be paid for the current period. The remaining earnings
are allocated to common stock and participating securities to the extent that each security may
share in earnings as if all of the earnings for the period had been distributed. The total
earnings allocated to each security are determined by adding together the amount allocated for
dividends and the amount allocated for a participation feature. The total earnings allocated to
each security are divided by the number of outstanding shares of the security to which the earnings
are allocated to determine the earnings per share for the security.
For the three months ended March 31, 2010 and 2009, diluted net loss per share was the same as
basic net loss per share since the effects of potentially dilutive securities are anti-dilutive.
Historical outstanding anti-dilutive securities not included in net loss per share calculation
are as follows (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Stock options |
5,028 | 5,677 | ||||||
Restricted stock |
2,436 | 1,446 | ||||||
7,464 | 7,123 | |||||||
NOTE E SEGMENT INFORMATION
The Company has determined that it operates in only one segment, as it only reports profit and
loss information on an aggregate basis to its chief operating decision maker.
The Company categorizes revenue by major type. Refer to the condensed consolidated statement
of operations for detail of revenue by major type.
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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
The Company also categorizes revenue by geographic region. Revenues are attributed to
geographic region based on country location of the customer site. The following table summarizes
revenue by geographic region (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Americas (1) |
$ | 13,333 | $ | 18,239 | ||||
Europe and Middle East |
19,563 | 6,275 | ||||||
Asia-Pacific |
9,184 | 6,109 | ||||||
$ | 42,080 | $ | 30,623 | |||||
(1) | Americas contains revenue from the United States of $12.7 million and $17.6 million
for the periods ended March 31, 2010 and 2009, respectively. |
NOTE F INCOME TAXES
The estimated annual effective tax rate is adjusted quarterly, and items discrete to a
specific quarter are reflected in tax expense for that interim period. The estimated annual
effective income tax rate includes the effect of a valuation allowance expected to be necessary at
the end of the year for deferred tax assets related to originating deductible temporary differences
and carryforwards during the year. A valuation allowance is established when necessary to reduce
deferred tax assets to an amount more-likely-than-not to be realized.
For the three months ended March 31, 2010 and 2009, the Company recorded an income tax benefit
resulting in an effective income tax rate of 0.7%. The effective tax rate for the period differed
significantly from the statutory tax rate primarily due to recording a valuation allowance for
deferred tax assets in domestic and certain foreign taxing jurisdictions that are not
more-likely-than-not to be realized. There were no material changes in unrecognized tax benefits
during the three months ended March 31, 2010, nor does the Company anticipate a material change in
total unrecognized tax benefits within the next 12 months.
NOTE G COMMITMENTS AND CONTINGENCIES
On occasion, the Company is subject to proceedings, lawsuits and other claims related to
patents, products and other matters. The Company assesses the likelihood of any adverse judgments
or outcomes with respect to these matters and determines loss contingency assessments on a gross
basis after assessing the probability of incurrence of a loss and whether a loss is reasonably
estimable. In addition, the Company considers other relevant factors that could impact its ability
to reasonably estimate a loss. A determination of the amount of reserves required, if any, for
these contingencies is made after analyzing each matter. The Companys reserves may change in the
future due to new developments or changes in strategy in handling these matters.
Pending Litigation
On May 30, 2008 and June 10, 2008, two separate complaints were filed by certain shareholders
of the Company in the U.S. District Court for the Western District of Wisconsin (the Court) against
the Company and certain of its officers and all of its independent directors during the period in
question. The complaints were consolidated on October 23, 2008. The consolidated action alleges
that the defendants violated the Securities Act of 1933 (Securities Act) with respect to statements
made in connection with the initial and secondary public offerings of the Companys common stock
and the Securities Exchange Act of 1934 (Exchange Act) by misrepresenting the Companys projected
financial outlook during the period May 9, 2007 through April 17, 2008. The named plaintiffs,
Michael Schultz, John Scala, et al., seek to represent persons who purchased the Companys
securities between those dates and who were damaged as a result of the decline in the price of the
Companys stock between those dates, allegedly attributable to the financial misrepresentations,
and seek compensatory damages in an unspecified amount.
The Company moved to dismiss the consolidated complaint on December 8, 2008. On July 9, 2009,
the Court ruled on the motion to dismiss the consolidated complaint by dismissing without prejudice
all claims under the Exchange Act and all but one claim under the Securities Act for failure to
state a claim upon which relief could be granted. On August 3, 2009, the plaintiffs amended the
consolidated complaint by filing their Second Amended Consolidated Complaint (the Amended
Complaint). The Company moved to dismiss the Amended Complaint on September 3, 2009, and on
December 15, 2009 the Court granted this second motion to dismiss in part and denied it in part.
The plaintiffs have moved for class certification and briefing on that motion is ongoing. The
Company continues to believe that it has substantial legal and factual defenses to the allegations
contained in the Amended Complaint, and it intends to pursue these defenses vigorously. There can
be no assurance, however, that the Company will prevail. Although the Company carries insurance for
these types of claims and related defense costs, a judgment significantly in excess of the
Companys insurance coverage could materially and adversely affect the Companys financial
condition, results of operations and cash flows. As of March 31, 2010, the Company estimated that
its potential loss from these claims and related defense costs will not exceed its insurance
deductible of $0.5 million.
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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Reserve for Contingency
On July 17, 2009, Hi-Art Co., Ltd. (Hi-Art), the Companys former distributor in Japan, filed
a complaint against the Company in the Tokyo District Court seeking compensation it claims is owed
by the Company. Although the Company believes it has substantial legal and factual defenses to
Hi-Arts allegations and intends to pursue these defenses vigorously, there can be no assurance
that the Company will prevail. Accordingly, the Company maintains a reserve with respect to this
matter.
Operating leases
The Company leases six facilities under separate operating leases with various expiration
dates through 2018. The Company also leases automobiles under separate operating leases with
various expiration dates through 2013. Rent expense was $1.2 million during the three months ended
March 31, 2010 and 2009.
Initial terms for facility leases are up to 13 years, with renewal options at various
intervals, and may include rent escalation clauses. The total amount of the minimum rent is
expensed on a straight-line basis over the initial term of the lease unless external economic factors exist such that renewals are reasonably assured, in which case the Company
includes the renewal period in its amortization period. Most of the leases provide that the
Company pay taxes, maintenance, insurance and certain other expenses applicable to the leased
premises. The Company expects that in the normal course of business leases that expire will be
renewed or replaced by other leases.
NOTE H STOCK INCENTIVE PLANS
The Company sponsors three stock plans, two stock incentive plans and an employee stock
purchase plan (the Plans), which allow for the grant of incentive stock options, nonqualified stock
options and restricted stock. Each option grant entitles the holder to purchase a specified number
of shares of Tomo common stock at a specified price that may not be less than the fair market value
on the grant date. Although the option grants under the Plans may have a maximum life of up to ten
years, the majority of the grants made to date have lives of six years and vest at various
intervals. Each restricted stock grant entitles the holder to receive a specified number of Tomo
shares of common stock and vests at various intervals. Vesting schedules are determined at the
grant date by the Compensation Committee of Tomos Board of Directors.
Tomos Board of Directors approved the 2007 Equity Incentive Plan and approved an amendment
thereto in March 2009 (as amended, the 2007 Plan). Under the 2007 Plan, Tomos Board of Directors
is authorized to grant stock-based awards to employees, directors, and consultants for up to
7,335,822 shares in aggregate. As of March 31, 2010, the two other plans remained in effect along
with the 2007 Plan; however, equity-based awards may only be granted under the 2007 Plan.
The following table summarizes the activity under the Plans (in thousands, except for
weighted-average exercise price and weighted-average fair value at grant date):
Incentive Stock Options | Restricted Stock | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
Shares | Number of | Weighted- | Average | |||||||||||||||||
Available | Options | Average | Number of | Fair Value | ||||||||||||||||
for Grant | Outstanding | Exercise Price | Shares | at Grant Date | ||||||||||||||||
Balance at December 31, 2009 |
3,667 | 5,347 | $ | 5.02 | 2,488 | $ | 5.01 | |||||||||||||
Exercised |
| (213 | ) | 2.69 | (2 | ) | 2.70 | |||||||||||||
Cancelled |
62 | (106 | ) | 7.32 | (50 | ) | 4.81 | |||||||||||||
Balance at March 31, 2010 |
3,729 | 5,028 | $ | 5.07 | 2,436 | $ | 5.02 | |||||||||||||
Exercisable at March 31, 2010 |
4,256 | $ | 4.61 | |||||||||||||||||
At March 31, 2010, the Companys weighted-average remaining contractual term was 3.3
years for all outstanding stock options, 3.3 years for outstanding vested stock options and 2.0
years for restricted stock. In addition, the Companys aggregate intrinsic value was $1.4 million
for all outstanding stock options and $1.3 million for outstanding vested stock options that were
outstanding at March 31, 2010.
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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
The fair values of each option grant for the three months ended March 31, 2009 were estimated
at the date of grant using the Black-Scholes option-pricing model based on the assumptions in the
following table. There were no option grants during the three months ended March 31, 2010.
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Expected term (years) |
N/A | 4.25 | ||||||
Risk-free interest rate |
N/A | 1.9 | % | |||||
Expected volatility |
N/A | 53 | % | |||||
Expected dividend |
N/A | 0 | % | |||||
Expected forfeiture rate |
N/A | 5.5 | % | |||||
Weighted-average fair value at grant date |
N/A | $ | 2.70 |
NOTE I RELATED PARTY TRANSACTIONS
The Company has an exclusive license agreement with the Wisconsin Alumni Research Foundation
(WARF), a shareholder of the Company, to make, use, sell and otherwise distribute products under
certain of WARFs patents anywhere in the world. The Company is required to pay WARF a royalty for
each product sold. The Company has recorded as cost of revenue WARF royalties of $0.2 million and
$0.1 million during the three months ended March 31, 2010 and 2009, respectively. The license
agreement expires upon expiration of the patents and may be terminated earlier if the Company so
elects. The Company may also grant sublicenses to third parties but must pay WARF 50% of all fees,
royalties and other payments received. WARF has the right to terminate the license agreement if the
Company does not meet the minimum royalty obligations, which are $0.3 million per year, or if the
Company commits any breach of the license agreements covenants. If the Company were to lose this
license, it would be unable to produce or sell the System. The Company had WARF royalty payable
balances of $0.2 million and $0.3 million as of March 31, 2010 and December 31, 2009, respectively.
NOTE J INVESTMENT IN COMPACT PARTICLE ACCELERATION CORPORATION
During April 2008, Tomo established a new affiliate, CPAC, to develop a compact proton therapy
system for the treatment of cancer. CPACs investors include Tomo, private investors and potential
customers.
Although Tomos ownership in CPAC is less than 50%, it has consolidated CPAC, as Tomo is the
primary beneficiary of CPAC, due to its overall control of CPACs activities and Tomos ownership
interest in CPAC. Therefore, CPACs outside stockholders interests are shown in the Companys
condensed consolidated financial statements as Non-controlling interests (See Note B). Tomo
contributed intellectual property with a fair market value of approximately $1.9 million as its
investment in CPAC. CPAC raised additional capital from third-party investors of $6.9 million and
$6.5 million in 2009 and during the three months ended March 31, 2010, respectively. As of
December 31, 2009 and March 31, 2010, Tomos ownership interest in CPAC was 7.3% and 5.3%,
respectively.
Other than a previously agreed to arms-length contractual agreement to provide certain support
and management services, Tomo has not provided financial or other support to CPAC, and Tomo has no
contractual obligation to provide financial support in the future beyond the aforementioned
services. The assets of CPAC are restricted to the settlement of CPACs obligations. The
creditors and beneficial interest holders of CPAC have no recourse to the general credit of Tomo.
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TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
NOTE K RESTRUCTURING
In October 2009, Tomos management approved a restructuring program to downsize certain customer
service and administrative functions and to terminate the employment of 61 employees during the
period from October 14 through December 31, 2009. As a result of the restructuring program, the
Company recognized a total restructuring charge of approximately $1.9 million in the fourth quarter
of 2009. The remaining $0.1 million liability at March 31, 2010 is expected to be paid in 2010. A
summary of activity for this liability is as follows (in thousands):
Balance, at December 31, 2009 |
$ | 998 | ||
Additions |
| |||
Payments |
(902 | ) | ||
Balance, at March 31, 2010 |
$ | 96 | ||
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read together with our unaudited condensed consolidated
financial statements and the notes to those financial statements, which are included in this
report. This report may contain or incorporate by reference forward-looking statements made
pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended
(the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act). These statements reflect managements expectations, estimates and assumptions,
based on information available at the time of the statement or, with respect to any document
incorporated by reference, available at the time that such document was prepared. Forward-looking
statements include, but are not limited to, statements regarding future events, plans, goals,
objectives, prospects and expectations. Forward-looking statements are often, but not always, made
through the use of words such as believe, anticipate, should, intend, plan, will,
likely, expect, estimate, project and similar expressions. Forward-looking statements are
not guarantees of future performance and involve risks, uncertainties, and other factors,
including, but not limited to, those discussed below under Factors Affecting Our Financial
Performance and those in the section entitled Risk Factors under Part II, Item 1A. of this
Quarterly Report on Form 10-Q, which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements expressed or implied
by those statements. We undertake no obligation to, and expressly disclaim any such obligation to,
update or revise any forward-looking statements to reflect changed assumptions, the occurrence of
anticipated or unanticipated events or changes to future results over time or otherwise, except as
required by law.
Overview
We develop, manufacture, market and sell advanced radiation therapy solutions to treat a wide
range of cancer types. We market and sell our products to hospitals and cancer treatment centers
in North America, Europe, the Middle East and Asia-Pacific and offer customer support services in
each region either directly or through distributors.
The treatment systems in our TomoTherapy platform (collectively, the System or Systems)
operate on a ring gantry and combine integrated CT imaging with conformal radiation therapy to
deliver sophisticated radiation treatments with speed and precision while reducing radiation
exposure to surrounding healthy tissue. Our Systems include: (1) the Hi Art treatment system, (2)
the TomoHD treatment system, and (3) the TomoMobile relocatable radiation therapy solution. The Hi
Art treatment system is our flagship product and has been used since 2003 to deliver CT-guided,
helical intensity-modulated radiation therapy (IMRT) treatment fractions. The TomoHD treatment
system was announced in October 2009, is targeted for shipment in the second half of 2010 and
includes both our TomoHelical and TomoDirect treatment modalities to enable cancer centers to treat
a broader patient population with a single device. The TomoMobile relocatable radiation therapy
solution was first shipped in late 2009, consists of a standard TomoTherapy treatment system housed
in a movable coach and is designed to improve access and availability of state-of-the-art cancer
care.
For the three months ended March 31, 2010 and 2009, our revenue was $42.1 million and $30.6
million, respectively, an increase of 37%, and our net loss attributable to shareholders was $4.7
million and $13.0 million, respectively, a reduction of 64%. Our results of operations for the
three months ended March 31, 2010 improved over the comparable 2009 period despite the continued
impact of the global economic downturn, the ongoing credit crisis, uncertainty regarding national
healthcare reform and enhanced competitive pressure. Although we experienced a net loss in the
first quarter of 2010, we maintained a working capital balance of $164.1 million, including $148.7
million of cash and short-term investments as of March 31, 2010. Thus, we believe we will be able
to fund ongoing operations and to invest in future product offerings for at least the next 12
months.
Despite continued economic uncertainty in 2010, we are encouraged by the improving trends in
macroeconomic conditions and we remain confident in the future commercial demand for our technology
and product offerings due to planned future new products and product enhancements and anticipated
growth in demand for image-guided radiation therapy equipment.
Factors Affecting Our Financial Performance
Our financial performance is significantly affected by the following factors:
Incoming Orders
Since we sell high-priced capital equipment with a transaction cycle that can take many months
between customer order and delivery, an important measure of our future financial performance is
the dollar value of incoming orders for equipment. During the first three months of 2010, we
experienced an increase in incoming orders as compared to the first three months of 2009 despite
the continued impact of the global economic downturn, the ongoing credit crisis, increased
competitive pressure and uncertainty regarding national healthcare reform. We believe this
increase in orders is the result of improvements generated by the transition in sales leadership
implemented during 2009, recent product introductions and improving trends in macroeconomic
conditions.
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Since the System is a major capital expenditure, our customers may require funding through a
credit facility or lease arrangement. In the current economic environment, some customers may have
difficulty obtaining the necessary credit or are subject to increased constraints on their use of
available cash. In addition, the current economic environment may cause potential new customers to
delay placing capital equipment orders or to purchase equipment that is less costly.
We are still experiencing heightened competition in the marketplace; see Item 1A. Risk Factors
in Part II to this Quarterly Report on Form 10-Q for further information. To counter this
competitive pressure, we continue to strive to improve the quality and effectiveness of our sales
force, increase our focus on group purchasing organizations and national accounts, increase our
emphasis on regional user meetings and expand our product features. We have also extended our
product portfolio from one to three market offerings. Furthermore, we believe continued innovation
and expansion of our clinical capabilities will extend our technology leadership position, increase
our prospects for greater market share and generate revenue growth.
Backlog
As of March 31, 2010, we had a backlog of $134.2 million, the majority of which we believe
should convert to revenue within the next 12 months. We define backlog as the total contractual
value of all firm orders received for the System and related options that we believe are likely to
ship within 24 months. To be included in backlog, such orders must be evidenced by a signed
quotation or purchase order from the customer or distributor.
On a regular basis, we review our open orders to determine if they meet our backlog definition
by evaluating various factors including site identification, requested delivery date and customer
or distributor history. If they no longer meet our backlog definition, due to uncertainty
regarding customer project sites and customer shipping schedules, we remove the orders from our
backlog. As a result of this process, one order was removed from our backlog during the three
months ended March 31, 2010 due to a cancellation resulting from a change to the customers
business plans.
Revenue
Product revenue. The majority of our product revenue is generated from sales of the System.
We negotiate the actual purchase price with each customer or distributor, and, historically, the
purchase price has varied across geographic regions.
While we are starting to see some improvement in the market, we expect our 2010 revenue to be
comparable to 2009 revenue due to the combination of the continued impact of the global economic
downturn, the ongoing credit crisis, uncertainty regarding national healthcare reform and enhanced
competitive pressure. However, we remain confident in the future commercial demand for our
technology and product offerings due to our planned future new products and product enhancements
and anticipated growth in demand for image-guided radiation therapy equipment.
Our revenue projections can be impacted by a number of factors, including the following:
| On average, the System is shipped to our customer within 12 months after we receive the
order. However, individual orders may become delayed and take longer than 12 months to
ship. Timing of deliveries can be affected by factors out of our control such as
construction delays at customer project sites and customer credit issues. For direct and
non-certified distributor sales, we recognize revenue upon end customer acceptance of the
System, which usually occurs three to four weeks after its delivery. For certified
distributor sales, we recognize revenue upon shipment of the System to the certified
distributor. Each System installation represents a significant percentage of our revenue
for the period in which it occurs. |
| Our geographic mix of customers may impact our average selling prices. Increased sales
of the System outside of North America have tended to favorably impact our gross margins
due to higher average selling prices in these markets. We intend to continue to expand our
international selling efforts, although we cannot be certain that favorable pricing trends
will continue. As of March 31, 2010, we did not have a hedging program in place to offset
foreign exchange risk and, therefore, cannot be certain of how foreign currency exchange
rates will impact our financial results in the future. |
| Our ability to demonstrate the clinical benefits of the System compared to competing
systems is a factor in our ability to increase market demand for the System. To compete
effectively, we may need to offer additional features that could require substantial
additional resources to develop. |
| Our focus on sales to group purchasing organizations (GPOs) and multi-center customers
may require us to lower selling prices, as these customers have negotiated quantity
discounts. Orders from these customers may remain in backlog longer than those from customers who place single unit orders, as units sold to multi-center
customers tend to install sequentially over a longer period of time. |
| The System is a major capital equipment item that represents a significant purchase for
most of our customers. While we believe macroeconomic conditions are beginning to improve,
our customers remain cautious and, as a result, may choose to delay some of their capital
spending or may not have or be able to obtain the funds necessary to purchase equipment
such as the System. As a result, our incoming orders and subsequent revenue recognition
may be materially adversely affected. |
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Also included in our product revenue are sales of optional equipment and software enhancements
purchased by our end customers. Because we plan to further develop the System by adding upgraded
features, we expect continued revenue growth from sales of optional equipment and software
enhancements to new and existing customers.
Service revenue. Our service revenue is generated primarily from post-warranty service
contracts and the sale of service spare parts. Our service contracts may be purchased with
one-year or multiple-year terms and for a variety of service levels, giving our customers the
option to contract for the level of support they desire. As of March 31, 2010, our most popular
service plan continued to be our Total TLC Service Package (Total TLC). Under Total TLC, we
provide customers with full spare parts coverage, including installation service by our field
service engineers, full scheduled maintenance and unplanned repair service. We recognize service
contract revenue ratably over the term of the contract. We recognize revenue from spare parts,
which are primarily sold to our distributors, upon shipment. As the number of installed Systems
continues to grow, we expect growth in our revenue from post-warranty service contracts.
Our ability to execute our strategies to increase incoming orders, to expand backlog with high
quality orders, to raise sales of optional equipment and software enhancements and to grow our
service revenue will have a direct impact on our ability to increase overall revenue in the future.
If we are unable to successfully execute these strategies, we may generate revenue at levels that
are lower than those we have generated in the past.
Cost of revenue
Cost of revenue includes all of our manufacturing and service costs. It consists of material,
labor and overhead costs incurred in manufacturing the System. It also includes the cost of
shipping the System to the customer site, installation costs, warranty provision and royalty
payments to Wisconsin Alumni Research Foundation (WARF), one of our shareholders. Finally, cost of
revenue includes the customer support expenses required to service and repair the System during the
warranty and service contract periods.
In future periods, we expect to improve our gross margins through the following initiatives:
| Service and support expenses. We have a small number of individual service contracts
that produce negative gross profit margins for which we have recorded a reserve for the
related estimated future losses. We anticipate the number of contracts producing negative
margins will decline as we further our efforts in reducing the overall average direct
service costs per installed System. We expect to continue to improve service contract
margins by leveraging our service infrastructure costs over a larger installed base,
increasing the price for some of our older annual service contracts, training our personnel
to improve their problem-solving capabilities, implementing remote diagnostic
functionalities, outsourcing certain tasks when cost-effective and feasible and introducing
component design changes aimed at reducing costs, increasing longevity and improving
serviceability of our spare parts. We believe that achieving certain of these initiatives
should also lead to reduced warranty costs and improved System performance. |
| Component supply and cost. Our cost of revenue continues to be impacted by high
component costs and high replacement rates. We continue to develop alternate components
and implement enhancements to increase the performance of components used in the System.
We are also seeking to identify lower-priced components of comparable or improved
performance and quality, as well as making engineering improvements to the System in order
to reduce costs. We believe that achieving these goals should result in reduced
manufacturing, warranty and service support costs in the long term. |
Our ability to execute on these strategies to reduce customer service and support expenses, as
well as component costs and failure rates, will have a direct impact on our ability to improve
profitability in the future. If we are unable to successfully execute these strategies, we may
experience margins that are similar to or lower than our past margins.
Research and development expenses
Research and development expenses consist primarily of salary and benefits for research and
development personnel who design and develop future products and product enhancements. Research
and development also includes expenses associated with product design and development, the Compact Particle Acceleration Corporation (CPAC) proton therapy
research project, customer research collaborations and fees to third parties who furnish services
related to these activities.
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We expect research and development expenses to increase during 2010 as compared to 2009, both
in dollars and as a percentage of total revenue, as we intend to increase our spending to support
our ongoing product development initiatives. In addition, we expect to capitalize fewer software
development costs related to ongoing product development projects in 2010 as compared to 2009, and
we expect CPACs expenses to increase during 2010, provided it obtains additional funding.
Selling, general and administrative expenses
Selling, general and administrative expenses consist of salary and benefits for executive
management, sales, marketing and other corporate functions. Also included in these expenses are
travel, sales commissions, trade shows and marketing materials and expenses related to accounting,
legal, tax and other consulting fees.
We expect 2010 selling, general and administrative expenses to increase in both dollars and as
a percentage of total revenue as compared to 2009, as we intend to increase our selling and
marketing expenses to further promote our products to our targeted markets. In addition, we expect
to increase our general and administrative spending, as we plan to add resources to meet the
requirements of our corporate functions.
Nonoperating expenses
Because we conduct business in numerous foreign jurisdictions, we are exposed to changes in
foreign currency exchange rates. Foreign currency exchange rate fluctuations could materially
adversely affect our business, financial condition and results of operations. Our primary
exposures are related to foreign currency denominated sales and expenses in Europe. As of March
31, 2010, we did not have a hedging program in place to offset these risks.
Interest income
We expect interest income to decline in 2010 as compared to 2009, due to both lower levels of
investable cash and reduced interest rates.
Income tax expense (benefit)
We are subject to taxation in the United States and in numerous foreign jurisdictions.
Significant judgments and estimates are required when evaluating our tax positions and determining
our worldwide provision for income taxes. As a result, our effective tax rate may fluctuate based
on a number of factors including variations in projected taxable income in the numerous geographic
locations in which we operate, changes in the valuation of our deferred tax assets, tax positions
taken on tax returns filed in the geographic locations in which we operate, introduction of new
accounting standards and changes in tax liabilities to address potential tax exposures related to
business and income tax positions we have taken that could be challenged by taxing authorities.
When deemed necessary, valuation allowances are established to reduce deferred tax assets to
amounts more-likely-than-not to be realized. This requires an assessment of both positive and
negative evidence when determining whether it is more-likely-than-not that deferred tax assets will
be realized. Evidence considered during the first three months of 2010 included the existence of
cumulative three-year losses, a decreased backlog, projected current year losses and the negative
impact of current economic conditions, which resulted in the recording of a valuation allowance to
offset net deferred tax assets in domestic and certain foreign taxing jurisdictions.
Noncontrolling interests
Our condensed consolidated financial statements include the accounts of CPAC. Although Tomos
ownership in CPAC is less than 50%, it has consolidated CPAC, as Tomo is the primary beneficiary of
CPAC, due to its overall control of CPACs activities and Tomos ownership interest in CPAC.
Therefore, CPACs outside stockholders interests are shown in our condensed consolidated financial
statements as Non-controlling interests. If CPAC obtains additional funding, we expect our
ownership percentage to continue to decline.
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Results of Operations
The following table sets forth certain elements from our condensed consolidated statements of
operations as a percentage of revenue for the periods indicated:
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
Product |
69.5 | % | 69.0 | % | ||||
Service and other |
30.5 | 31.0 | ||||||
Total revenue |
100.0 | 100.0 | ||||||
Cost of revenue: |
||||||||
Product |
30.4 | 38.4 | ||||||
Service and other |
39.6 | 53.3 | ||||||
Total cost of revenue |
70.0 | 91.7 | ||||||
Gross profit |
30.0 | 8.3 | ||||||
Operating expenses: |
||||||||
Research and development |
17.9 | 19.1 | ||||||
Selling, general and administrative |
26.2 | 34.8 | ||||||
Total operating expenses |
44.1 | 53.9 | ||||||
Loss from operations |
(14.1 | ) | (45.6 | ) | ||||
Other income |
0.2 | 1.4 | ||||||
Loss before income tax |
(13.9 | ) | (44.2 | ) | ||||
Income tax benefit |
0.1 | 0.3 | ||||||
Net loss |
(13.8 | )% | (43.9 | )% | ||||
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Revenue
Revenue by major type for the three months ended March 31, 2010 and 2009 was as follows (in
thousands):
Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Product revenue |
$ | 29,229 | 69.5 | % | $ | 21,133 | 69.0 | % | ||||||||
Service and other revenue |
12,851 | 30.5 | 9,490 | 31.0 | ||||||||||||
$ | 42,080 | 100.0 | % | $ | 30,623 | 100.0 | % | |||||||||
Revenue by geographic region for the three months ended March 31, 2010 and 2009 was as
follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Americas (1) |
$ | 13,333 | 31.7 | % | $ | 18,239 | 59.6 | % | ||||||||
Europe and Middle East |
19,563 | 46.5 | 6,275 | 20.5 | ||||||||||||
Asia-Pacific |
9,184 | 21.8 | 6,109 | 19.9 | ||||||||||||
$ | 42,080 | 100.0 | % | $ | 30,623 | 100.0 | % | |||||||||
(1) | Americas contains revenue from the United States of $12.7 million and $17.6 million
for the periods ended March 31, 2010 and 2009, respectively. |
Product revenue increased $8.1 million, or 38%, between periods. The increase was primarily
due to a higher number of Systems installed and accepted during the three months ended March 31,
2010 versus the three months ended March 31, 2009. Also contributing to the increase was a $2.8
million increase in revenue due to higher average selling prices of the System during the first
quarter of 2010 compared to the first quarter of 2009, resulting from a higher volume of sales in
Europe and the Middle East, which typically carry higher average selling prices.
Service and other revenue increased $3.4 million, or 35%, between periods. This increase was
primarily attributable to an increase in service contract revenue, as more Systems moved from
warranty to service contract coverage. There were 43% more units covered by service contracts at
March 31, 2010 as compared to March 31, 2009. The number of distributor sites under service
contract increased more significantly than our direct service contracts. Service contracts for
distributor sites provide coverage for parts only and, therefore, are priced lower than our direct
service contracts.
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Cost of revenue
Cost of revenue increased to $29.5 million for the three months ended March 31, 2010 from
$28.1 million for the three months ended March 31, 2009, an increase of $1.4 million, or 5%,
primarily due to increased System sales in the current quarter.
Manufacturing period expenses decreased by $0.8 million for the three months ended March 31,
2010 as compared to the three months ended March 31, 2009. This decrease was primarily due to an
increase in manufacturing activity during the period, which led to an increase in absorbed costs.
Total service and support costs increased by $0.4 million for the three months ended March 31,
2010 compared to the three months ended March 31, 2009. Although there was a $2.6 million increase
in our overall service contract costs during the first quarter of 2010, due to the larger number of
units under service contract at March 31, 2010 as compared to March 31, 2009, such increase was
partially offset by a $2.2 million decline in service infrastructure costs, as labor and overhead
costs absorbed increased $1.1 million, costs associated with component and software upgrades to the
installed base and related projects decreased $0.6 million, and employee costs decreased $0.5
million.
Warranty expenses increased $0.2 million for the three months ended March 31, 2010 compared to
the three months ended March 31, 2009 due to more Systems being installed and accepted in the
current quarter.
Research and development expenses
Research and development expenses by category for the three months ended March 31, 2010 and
2009 were as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||||||
System R&D |
$ | 6,643 | $ | 5,581 | $ | 1,062 | 19.0 | % | ||||||||
Proton Project / CPAC R&D |
897 | 268 | 629 | 234.7 | ||||||||||||
$ | 7,540 | $ | 5,849 | $ | 1,691 | 28.9 | % | |||||||||
Total research and development expenses increased $1.7 million, or 29%, between periods.
System research and development activities increased by $1.1 million between periods primarily due
to a $0.8 million decrease in capitalization of internal development costs related to certain
software options, which were completed and released for delivery in February 2010. The proton
therapy research project spending increased by $0.6 million during the three months ended March 31,
2010, due mainly to a $0.3 million increase in consultant fees, as CPAC expanded its development
activities during the first quarter of 2010 upon receipt of new project funding.
Selling, general and administrative expenses
Selling, general and administrative expenses increased to $11.0 million for the three months
ended March 31, 2010 from $10.7 million for the three months ended March 31, 2009, an increase of
$0.3 million, or 4%. The increase was primarily due to higher commissions as more Systems were installed and accepted during the three months ended March
31, 2010 compared to the three months ended March 31, 2009.
Other income (expense)
Other income decreased to $0.1 million for the three months ended March 31, 2010 from
$0.4 million for the three months ended March 31, 2009. The decline was primarily due to a $0.2
million decrease in interest income as our average investment balances and interest rates were
lower during the first quarter of 2010 as compared to 2009.
Income tax expense (benefit)
For the three months ended March 31, 2010, we recorded an income tax benefit of $0.04 million
resulting in an effective income tax rate of 0.7%. Our effective tax rate for the first quarter of
2010 differed significantly from the statutory tax rate primarily due to recording a valuation
allowance for deferred tax assets in domestic and certain foreign taxing jurisdictions that are not
more-likely-than-not to be realized. For the three months ended March 31, 2009, we recorded an
income tax benefit of $0.1 million resulting in an effective income tax rate of 0.7%.
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Liquidity and Capital Resources
To date, we have funded our working capital and capital expenditure requirements using cash
generated from sales of equity securities, operations and, to a lesser extent, borrowings. From
our inception through March 31, 2010, we obtained financing of $235.5 million primarily through
public and private placements of equity securities and the exercise of stock options.
Financial Condition
Our cash, cash equivalents and short-term investments were $148.7 million at March 31, 2010
compared to $154.3 million at December 31, 2009, a decrease of $5.6 million, or 4%. Information
regarding short-term investments, which totaled $56.6 million at March 31, 2010, is set forth in
the following table (in thousands):
March 31, 2010 | ||||||||||||||||
Cost basis | Unrealized gains | Unrealized losses | Fair value | |||||||||||||
U.S. Government and Agency securities |
$ | 43,456 | $ | 813 | $ | | $ | 44,269 | ||||||||
Corporate bonds |
12,099 | 264 | | 12,363 | ||||||||||||
$ | 55,555 | $ | 1,077 | $ | | $ | 56,632 | |||||||||
We entered into a $40 million revolving credit facility during 2009, under which there
were no borrowings as of March 31, 2010. This line of credit is currently set to expire on November
30, 2010. The facility requires us to maintain a minimum tangible net worth, a specified ratio of
total liabilities to tangible net worth and a minimum level of cash and short-term investments. We
were in compliance with these covenants at March 31, 2010. In addition, the facility provides for
an adjusted credit limit based on a certain level of tangible net worth and earnings before
interest, taxes, depreciation and amortization. Based on our levels as of March 31, 2010, the
adjusted credit limit remains unchanged at $30 million. Under the terms of the credit facility, we
may be considered in default upon a material adverse change in our financial condition or if the
bank believes the prospect of payment or performance of the facility is impaired.
Our working capital, which is calculated by subtracting our current liabilities from our
current assets, was $164.1 million at March 31, 2010 compared to $161.8 million at December 31,
2009, an increase of $2.3 million or 1%. Our shareholders equity was $180.8 million at March 31,
2010 compared to $183.4 million at December 31, 2009, a decrease of $2.6 million or 1%. The
increase in our working capital was primarily due to CPAC funding received during the first quarter
of 2010. The decrease in our shareholders equity was primarily caused by our operating loss
during the first three months of 2010.
Cash Flows
Cash flows from operating activities
Net cash used in operating activities was $11.1 million for the three months ended March 31,
2010. This included a net loss of $5.9 million, which was adjusted for the following noncash
items: $2.5 million in depreciation and amortization and $1.8 million in share-based
compensation. Receivables increased marginally by $0.2 million due to new billings in 2010
related to ongoing operations, partially offset by the collection of 2009 year-end balances.
Inventory increased by $6.1 million due to increased stocking levels to meet production needs at
March 31, 2010 compared to December 31, 2009. Accounts payable increased $5.5 million as our
inventory purchasing activity increased during the first quarter of 2010. Accrued expenses
decreased by $2.9 million due primarily to the payment of year-end accrued payroll, severance and
commissions as well as reduced warranty accruals due to decreased average costs per site. Deferred
revenue decreased by $2.0 million, due largely to a change in the mix of Systems awaiting customer
acceptance, and customer deposits decreased by $2.7 million, due mainly to the increase in
shipments during the first three months of 2010.
Net cash used in operating activities was $1.6 million for the three months ended March 31,
2009. This included a net loss of $13.4 million, which was adjusted for the following noncash
items: $2.4 million in depreciation and amortization, $1.5 million in share-based compensation and
$0.2 million in deferred income tax benefits. Receivables decreased by $8.5 million due to
collections of year-end balances and a lower number of System acceptances. Inventory increased by
$0.8 million due to the number of in-process Systems being built in anticipation of our second
quarter shipment schedule. Accounts payable increased by $3.3 million, as our inventory purchasing
activity increased during the period. Accrued expenses decreased by $3.7 million due primarily to
the decreases of payroll, severance, commission and warranty accruals. Deferred revenue increased
by $2.2 million due largely to an increase in deferred service contract revenue, as more customers
entered into service contracts due to growth in the installed system base. Customer deposits
decreased by $0.8 million due to a lower number of new orders received during the first quarter of
2009.
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Cash flows from investing activities
Net cash provided by investing activities was $19.8 million for the three months ended March
31, 2010, as we received approximately $21.3 million in proceeds from the sales and maturities of
short-term investments. These proceeds were partially offset by $1.2 million in purchases of
capital equipment, which included tools and equipment to support our operations and new computer
equipment and software.
Net cash used in investing activities was $4.7 million for the three months ended March 31,
2009, as we invested $7.5 million in short-term investments and $1.2 million in capital equipment,
which included tools and equipment to support our operations and new computer equipment and
software. In addition, we capitalized $0.9 million of internal development costs related to new
software products. Partially offsetting these investments, we sold $4.9 million of our short-term
investments during the period.
Cash flows from financing activities
Net cash provided by financing activities was $7.1 million for the three months ended March
31, 2010, primarily due to $6.5 million in proceeds from third-party investors related to the
issuance of CPAC common stock and, to a lesser extent, the exercise of equity-based awards by our
employees.
Net cash provided by financing activities was $6.3 million for the three months ended March
31, 2009, primarily due to $6.4 million in proceeds from third-party investors related to the
issuance of CPAC common stock.
The effect of foreign currency exchange rate changes on cash and cash equivalents resulted in
an increase of $0.2 million during the three months ended March 31, 2010. During the three months
ended March 31, 2009, the effect of foreign currency exchange rate changes on our cash and cash
equivalents resulted in a increase of $0.7 million.
Loans and Available Borrowings
There have been no significant changes to the loans and available borrowings we reported in
our Annual Report on Form 10-K for the year ended December 31, 2009.
Contractual Obligations and Commitments
There have been no significant changes to the contractual obligations and commitments we
reported in our Annual Report on Form 10-K for the year ended December 31, 2009.
Pending Litigation
On May 30, 2008 and June 10, 2008, two separate complaints were filed by certain of our
shareholders in the U.S. District Court for the Western District of Wisconsin (the Court) against
us and certain of our officers and all of our independent directors during the period in question.
The complaints were consolidated on October 23, 2008. The consolidated action alleges that the
defendants violated the Securities Act of 1933 (Securities Act) with respect to statements made in
connection with the initial and secondary public offerings of our common stock and the Securities
Exchange Act of 1934 (Exchange Act) by misrepresenting our projected financial outlook during the
period May 9, 2007 through April 17, 2008. The named plaintiffs, Michael Schultz, John Scala, et
al., seek to represent persons who purchased our securities between those dates and who were
damaged as a result of the decline in the price of our stock between those dates, allegedly
attributable to the financial misrepresentations, and seek compensatory damages in an unspecified
amount.
We moved to dismiss the consolidated complaint on December 8, 2008. On July 9, 2009, the Court
ruled on the motion to dismiss the consolidated complaint by dismissing without prejudice all
claims under the Exchange Act and all but one claim under the Securities Act for failure to state a
claim upon which relief could be granted. On August 3, 2009, the plaintiffs amended the
consolidated complaint by filing their Second Amended Consolidated Complaint (the Amended
Complaint). We moved to dismiss the Amended Complaint on September 3, 2009, and on December 15,
2009 the Court granted this second motion to dismiss in part and denied it in part. The plaintiffs
have moved for class certification and briefing on that motion is ongoing. We continue to believe
that we have substantial legal and factual defenses to the allegations contained in the Amended
Complaint, and we intend to pursue these defenses vigorously. There can be no assurance, however,
that we will prevail. Although we carry insurance for these types of claims and related defense
costs, a judgment significantly in excess of our insurance coverage could materially and adversely
affect our financial condition, results of operations and cash flows. As of March 31, 2010, we
estimated that our potential loss from these claims and related defense costs will not exceed our
insurance deductible of $0.5 million.
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Reserve for Contingency
On
July 17, 2009, Hi-Art Co., Ltd. (Hi-Art), our former distributor in Japan, filed a
complaint against us in the Tokyo District Court seeking compensation it claims is owed by us.
Although we believe that we have substantial legal and factual defenses to Hi-Arts allegations and
intend to pursue these defenses vigorously, there can be no assurance that we will prevail.
Accordingly, we maintain a reserve with respect to this matter.
Operating Capital and Capital Expenditure Requirements
Our future capital requirements depend on numerous factors. These factors include, but are not
limited to, the following:
| Revenue generated from sales of the System and service contracts; |
| The performance of the System operating in the field and corresponding service costs; |
| The level of investment required by our service and support organization; |
| The level of investment required for research and development activities; |
| Costs associated with our manufacturing, sales and marketing and general and
administrative activities; and |
| Effects of competing technological and market developments. |
The global economy remains volatile and could have potentially negative effects on our
near-term liquidity and capital resources, including slower collections of receivables, delays in
the delivery of existing orders and postponements of incoming orders. However, we believe that our
cash and short-term investments as of March 31, 2010, along with the cash we expect to generate
from operations, will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. As of March 31, 2010, we had $148.7 million
of cash and short-term investments. We do not expect to draw on our $30 million line of credit,
and we believe our financial position will remain strong throughout 2010. Moreover, we continue to
manage our cash resources and are carefully monitoring our ongoing expenditures.
Off-Balance Sheet Arrangements
As of March 31, 2010, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of
Regulation S-K.
Critical Accounting Policies and Estimates
Managements discussion and analysis of our financial condition and results of operations is
based on our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP). The preparation of these condensed consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base these estimates on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual results may differ
from these estimates.
For a description of our critical accounting policies and estimates, please refer to the
Critical Accounting Policies and Estimates section of Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form
10-K for the year ended December 31, 2009.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued new accounting
guidance on fair value measurements and disclosures. The new guidance defines fair value,
establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about
fair value measurements. In February 2008, the FASB issued further guidance, which provided a one
year deferral of the effective date for non-financial assets and non-financial liabilities, except
those that are recognized or disclosed in the financial statements at fair value at least annually.
This guidance applies under other accounting pronouncements that require or permit fair value
measurements, as the FASB previously concluded in those accounting pronouncements that fair value
is the relevant measurement attribute. Accordingly, this guidance does not require any new fair
value measurements. The new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of
the new guidance in 2008 and the further guidance in 2009 did not have a material impact on our
condensed consolidated financial statements.
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In June 2009, the FASB issued revised guidance for the accounting of variable interest
entities. This revised guidance replaces the quantitative-based risks and rewards approach with a
qualitative approach that focuses on identifying which enterprise has the power to direct the
activities of a variable interest entity that most significantly impact the entitys economic
performance and has the obligation to absorb losses or the right to receive benefits from the
entity that could be potentially significant to the variable interest entity. The accounting
guidance also requires an ongoing reassessment of whether an enterprise is the primary beneficiary
and requires additional disclosures about an enterprises involvement in variable interest
entities. The adoption of this accounting guidance, which became effective for us beginning in the
first quarter of fiscal 2010, did not have a material impact on our condensed consolidated
financial statements.
In September 2009, the FASB amended the accounting guidance on revenue recognition. Under the
amended guidance, consideration in a multiple element arrangement may now be allocated in a manner
that more closely reflects the structure of the transaction (new revenue guidance). Also, under
the new revenue guidance, tangible products that contain software components essential to the
functionality of the tangible product will no longer be subject to software revenue recognition
guidance and will now be subject to other revenue guidance. The new revenue guidance allows for
early or retrospective adoption and will be required as of January 1, 2011. We elected to early
adopt this new revenue guidance at the beginning of fiscal 2010 on a prospective basis for
applicable transactions originating or materially modified on or after January 1, 2010; we do not
expect the adoption of the new revenue guidance will have a material impact on our consolidated
financial statements.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our exposure to market risk is currently confined to changes in short-term investments,
foreign currency exchange and interest rates. Our exposure to market risk was discussed in Item
7A. Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K
for the year ended December 31, 2009. There have been no material changes to such exposure since
December 31, 2009.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Exchange Act) that are designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commissions rules and forms, and that
such information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by this Quarterly Report
on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of March 31, 2010.
Management has concluded that the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position,
results of operations and cash flows in conformity with U.S. GAAP.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. | Legal Proceedings |
We are subject to various claims and legal proceedings arising in the ordinary course of our
business. The description of the developments with respect to the pending securities class action
is incorporated herein by reference to Note G to our unaudited condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q. We believe that the ultimate resolution
of the various claims and legal proceedings to which we are subject will not have a material
adverse effect on our business, financial condition or results of operations.
Item 1A. | Risk Factors |
In addition to the risk factors set forth below and the other information set forth in this
report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in
our 2009 Annual Report on Form 10-K, which could materially affect our business, financial
condition or results of operations. Important factors that could cause our actual results,
performance or achievements to be materially different from any future results, performance or
achievements expressed or implied by statements in this Quarterly Report on Form 10-Q include, but
are not limited to, the risk factors discussed below or in Part I, Item 1A. Risk Factors in our
2009 Annual Report on Form 10-K. If any of the events discussed in such risk factors occur, our
business, financial condition and results of operations could be adversely affected in a material
way, and the market value of our common stock could decline.
We face competition from numerous competitors, many of which have greater resources than we do,
which may make it more difficult for us to achieve significant market penetration and maintain or
increase our prices.
The market for radiation therapy equipment is characterized by intense competition and pricing
pressure. We consider the competition for the TomoTherapy treatment systems to be existing
radiation therapy systems, primarily using C-arm linear accelerators, sold by large,
well-capitalized companies with significantly greater market share and resources than we have.
Several of these competitors are also able to leverage their fixed sales, service and other costs
over multiple products or product lines. In particular, we compete with a number of existing
radiation therapy equipment companies including Varian Medical Systems, Inc., Elekta AB, Siemens
Medical Solutions, and, to a lesser extent, Accuray Incorporated and BrainLAB AG. Varian Medical
Systems has been the radiation therapy systems market leader for many years and has the majority
market share for radiation therapy systems worldwide. In 2008, Varian began selling and installing
the RapidArc technology. The RapidArc technology purports to be able to deliver image-guided,
intensity-modulated radiation therapy more rapidly than other similar systems, including the Hi Art
system, and Varian has maintained a strong marketing campaign claiming this technology has the same
capabilities as, or better capabilities than, our Hi Art system. On April 14, 2010, Varian
announced the launch of a new line of accelerators it refers to as the TrueBeam platform, which
Varian claims are systems specifically designed for high-precision image-guided radiotherapy and
radiosurgery. Varian claims this new platform is designed to be versatile and can be used for all
forms of advanced external-beam radiotherapy. If we are unable to compete effectively with these
and other products of existing or future competitors, our revenue will decline, and there could be
a material adverse effect on our business, financial condition and results of operations. Some of
our competitors may compete by changing their pricing model or by lowering the price of their
conventional radiation therapy systems or ancillary supplies. If such pricing strategies are
implemented, there could be downward pressure on the price of radiation therapy systems. If we are
unable to maintain or increase our selling prices, our gross margins will decline, and there could
be a material adverse effect on our business, financial condition and results of operations.
Changes in healthcare policies and laws resulting from recent passage of the new healthcare law in
the United States could adversely affect our business.
In the United States, healthcare reform legislation was passed and signed into law in March
2010 in the form of the Patient Protection and Affordable Care Act of 2010, as amended by the
Health Care and Education Reconciliation Act of 2010 (the Healthcare Reform Law). The Healthcare
Reform Law imposes some new requirements on medical device manufacturers and may present other new
issues, some of which will be better understood as implementing regulations are issued. For
example, beginning January 1, 2013, we will be required to pay a 2.3% excise tax on our medical
device sales, which could impact our pricing or profitability. We will need to establish systems
and controls to ensure compliance with new transparency requirements relating to payments and other
transfers of value to certain of our customers for values of $10 or more (or $100 in aggregate
value in a calendar year), with the obligation to report such payments beginning January 1, 2013
for payments made in 2012. We also will need to understand and respond to comparative
effectiveness research activities initiated under the Healthcare Reform Law that could impact the
use of our products. If we are unable to respond effectively to these and other impacts of the
Healthcare Reform Law, as refined by subsequent regulations, our sales could decline and our costs
could increase in the United States, which could have a material adverse effect on our business,
financial condition and results of operations.
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Changes in reimbursement to healthcare providers for use of the TomoTherapy treatment system could
adversely affect sales of the TomoTherapy treatment system.
Our ability to market and sell the TomoTherapy treatment system successfully depends in part
on the extent to which sufficient reimbursement for treatment procedures using the TomoTherapy
treatment system will be available from third-party payors such as private health insurance plans
and health maintenance organizations and government payor programs such as Medicare and Medicaid.
Third-party payors, and in particular managed care organizations, challenge the prices charged for
medical products and services and institute cost containment measures to control or significantly
influence the purchase of medical products and services. For example, in November 2009, the United
States Centers for Medicare and Medicaid Services, or CMS, issued new reimbursement rates for 2010.
For 2010, CMS increased rates slightly for hospitals and implemented only modest reimbursement
rate decreases for free-standing clinics. However, CMS reviews such rates annually, and could
implement more significant changes in 2011 and future years. If in the future CMS significantly
decreases reimbursement rates for radiation oncology services, or if other cost containment
measures are implemented in the United States or elsewhere, clinicians may be reluctant to purchase
TomoTherapy treatment systems or may decline to do so entirely if they determine there is
insufficient coverage and reimbursement from third-party payors for the cost of procedures
performed, which could have an adverse impact on our sales.
Our success in non-U.S. markets also depends upon treatment procedures using our products
being eligible for reimbursement through government-sponsored healthcare payment systems, private
third-party payors and labor unions. Reimbursement and healthcare payment systems in international
markets vary significantly by country and, within some countries, by region. In many international
markets, payment systems may control reimbursement for procedures performed using new products as
well as procurement of these products. In addition, as economies of emerging markets develop, these
countries may implement changes in their healthcare delivery and payment systems. Healthcare cost
containment efforts are prevalent in many of the countries in which we sell, or intend to sell, our
products, and these efforts are expected to continue. Market acceptance of TomoTherapy treatment
systems in a particular country may depend on the availability and level of reimbursement in that
country. Our ability to generate sales may be adversely affected if customers are unable to obtain
or maintain adequate reimbursement for treatment procedures using our products in markets outside
of the United States
Our sales and receivables may be adversely impacted if current economic conditions persist or
worsen, or credit becomes more difficult to obtain on reasonable terms.
The TomoTherapy treatment systems are major capital equipment items that represent a
significant purchase for most of our customers and may require funding through a credit facility or
lease arrangement. If the global economy is weak, our customers may hesitate to place large
capital equipment orders for items such as the TomoTherapy treatment systems or they may be
required to delay or cancel previously planned purchases. Our customers may also be slower to pay,
thereby increasing receivables. A number of orders we expected to receive in 2009 have not been
placed because of certain hospitals freezes on capital equipment purchases. Although there are
some early indications that the U.S. economy may be improving, whether and when it will improve
significantly remains uncertain at the time of this filing. In Europe, the governments of certain
countries such as Greece and Portugal are struggling under heavy debt obligations that may impact
their economies and those of other countries in the European Union. If macroeconomic conditions
continue to be poor, our customers may purchase fewer TomoTherapy treatment systems, we may need to
reduce our prices or our customers may have difficulty paying us, any of which could have a
material adverse effect on our business, financial condition and results of operations.
Modifications, upgrades and future products related to the System may require new FDA premarket
approvals or 510(k) clearances, and such approval or clearance processes may be different than in
the past, which may impact our ability to market and sell both new and existing products.
The Systems are medical devices that are subject to extensive regulation in the United States
and elsewhere, including by the FDA and its foreign counterparts. Before a new medical device, or
a significant change involving a new use of or claim for an existing medical device, can be
marketed in the United States, it must first receive either premarket approval or 510(k) clearance
from the FDA, unless an exemption exists. Either process can be expensive and lengthy. The FDAs
510(k) clearance process has in the past usually taken from three to twelve months, but can last
longer. The process of obtaining premarket approval is much more costly and uncertain than the
510(k) clearance process and generally takes from one to three years, or even longer, from the time
the application is filed with the FDA. An element of our strategy is to continue to upgrade the
System to incorporate new software and hardware enhancements that may require the approval of or
clearance from the FDA or its foreign counterparts. The FDA requires medical device manufacturers
to determine whether or not a modification requires an approval or clearance. In the past, any
modification to an FDA approved or cleared device that would significantly affect its safety or
efficacy or that would constitute a major change in its intended use would require a new premarket
approval or 510(k) clearance. Certain upgrades previously released by us required 510(k) clearance
before we were able to offer them for sale. We have made modifications to the Hi Art system in the
past and may make additional modifications to our products in the future that we believe do not or
will not require additional approvals or clearances.
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The FDA and its foreign counterparts may change these policies, adopt additional regulations,
or revise existing regulations, each of which could prevent or delay premarket approval or 510(k)
clearance of our new or modified devices, or could impact our ability to market our currently
cleared devices. The FDA, for example, has recently sent letters to all manufacturers of radiation
therapy treatment systems, including TomoTherapy, announcing its intention to review the 510(k)
process and consider enhancements that could impact future 510(k) submissions. It has also
encouraged manufacturers to consult with the FDA as to the appropriate 510(k) clearance process for
any new product. Such changes could result in additional scrutiny by the FDA of 510(k)
applications that we submit and could result in delays and increased costs in obtaining FDA
clearances, which could materially impact our business, financial condition and results of
operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
Our initial public offering of 13,504,933 shares of our common stock, par value $0.01 per
share, was effected through a Registration Statement on Form S-1 (Reg. No. 333-140600), which was
declared effective by the Securities and Exchange Commission on May 8, 2007. We issued 10,602,960
shares on May 9, 2007 and received gross proceeds of $201.5 million. We paid the underwriters a
commission of $14.1 million and incurred additional offering expenses of approximately $2.7
million. After deducting the underwriters commission and the offering expenses, we received net
proceeds of approximately $184.7 million. The managing underwriter of our initial public offering
was Merrill Lynch & Co. In addition, 2,901,973 shares were sold by selling shareholders, 1,761,513
of which were purchased by the underwriters exercise of their overallotment option.
No payments of underwriters commissions or offering expenses were made directly or indirectly
to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of
any class of our equity securities, or (iii) any of our affiliates.
Through March 31, 2010, we used $95.4 million of the net proceeds from our initial public
offering, as detailed in the following table (in millions):
Working capital |
$ | 70.7 | ||
Purchases of property and equipment |
17.2 | |||
Purchases of test systems |
5.7 | |||
Acquisition of Chengdu Twin Peak Accelerator Technology Inc. |
1.5 | |||
Repayment of debt |
0.3 | |||
Total net proceeds used |
$ | 95.4 | ||
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | [Removed and Reserved] |
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Exhibit Number | Description | |||
3.1 | (1) | Amended and Restated Articles of Incorporation of the Company |
||
3.2 | (1) | Amended and Restated Bylaws of the Company |
||
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
32.2 | * | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Previously filed as an exhibit to the Companys Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on
November 7, 2008 (File No. 001-33452). |
|
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
TomoTherapy Incorporated has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
TOMOTHERAPY INCORPORATED |
||||
Date: May 6, 2010 | By: | /s/ Frederick A. Robertson | ||
Frederick A. Robertson | ||||
Chief Executive Officer and President | ||||
Date: May 6, 2010 | By: | /s/ Thomas E. Powell | ||
Thomas E. Powell | ||||
Chief Financial Officer and Treasurer |
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EXHIBIT INDEX
Exhibit Number | Description | |||
3.1 | (1) | Amended and Restated Articles of Incorporation of the Company |
||
3.2 | (1) | Amended and Restated Bylaws of the Company |
||
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 | * | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
||
32.2 | * | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Previously filed as an exhibit to the Companys Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on
November 7, 2008 (File No. 001-33452). |
|
* | Filed herewith. |
32