The following management's discussion and analysis should be read in conjunction with the financial statements and the related notes thereto contained in this Annual Report. In addition to historical information, this discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are subject to risks and uncertainties, including those under "Risk Factors" in this Annual Report that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements" in this Annual Report.
Unless otherwise indicated, references in this section to "
The following discussion highlights our results of operations and the principal
factors that have affected our financial condition as well as our liquidity and
capital resources for the periods described, and provides information that
management believes is relevant for an assessment and understanding of the
statements of financial condition and results of operations presented herein.
The following discussion and analysis are based on our consolidated financial
statements contained in this Annual Report, which we have prepared in accordance
with
A comparison of the results for the year ended
Company Overview
We design, manufacture and market the MRIdian MRI-guided Radiation Therapy System. The MRIdian is built upon a proprietary high-definition magnetic resonance ("MR") imaging system designed from the ground up to address the unique
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challenges and clinical workflow for advanced radiation oncology. There are two generations of the MRIdian: the first generation MRIdian with radiation delivery using Cobalt-60 and the second generation MRIdian Linac, with more advanced linear accelerator or 'linac' to deliver the radiation beams. MRIdian with Cobalt-60 is no longer commercially available.
Both generations of the MRIdian have received 510(k) marketing clearance from
the FDA and permission to affix the CE mark. Additionally, the newest version of
MRIdian, MRIdian A3i, received 510(k) marketing clearance from the FDA in
MRIdian is the first radiation therapy system that enables simultaneous radiation treatment delivery and real-time MRI imaging of a patient's internal anatomy. It generates high-quality images that differentiate between the targeted tumor, surrounding soft tissue and nearby critical organs. MRIdian also records the level of radiation dose that the treatment area has received, enabling physicians to adapt the prescription between treatments, as needed. We believe this improved visualization and accurate dose recording will enable better treatment, improve patient outcomes and reduce side effects. Key benefits to users and patients include: improved imaging and patient alignment; the ability to adapt the patient's radiation treatments to changes while the patient is still on the treatment table, or "on-table adaptive treatment planning"; MRI-based motion management; and an accurate recording of the delivered radiation dose. Physicians have already used MRIdian to treat a broad spectrum of radiation therapy patients with more than 45 different types of cancer, as well as patients for whom radiation therapy was previously not an option.
MRIdian A3i streamlines the on-table adaptive workflow by allowing clinicians to intelligently auto-contour, auto-adapt, and auto-gate. Enabling clinicians to collaborate simultaneously and connect remotely during patient treatment. The automated workflow steps and contouring tools are designed to minimize clinician time and increase patient throughput.
MRIdian A3i expands existing real-time tissue tracking and automated beam gating functionalities to include multiplanar tracking and gating in up to three planes. Our customers have the flexibility to select up to three different tracking targets in any combination of coronal, sagittal, or axial planes to automatically stop the beam when any single target exceeds the clinician-defined treatment boundaries.
At
We currently market MRIdian through a direct sales force in
We generated product, service and distribution rights revenues of
We expect to continue to incur significant expenses and operating losses for the foreseeable future. We expect our expenses will increase substantially in connection with our ongoing activities, as we:
•navigate our business activities through the impacts of the COVID-19 pandemic;
•manage delays experienced by our third-party suppliers and distributors;
•continue our research and development efforts;
•seek regulatory approval for MRIdian in certain foreign countries; and
•operate as a public company.
Accordingly, we may seek to fund our operations through public or private equity, debt financings or other sources. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop enhancements to and integrate new technologies into MR Image-Guided radiation therapy systems.
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On
On
Term Loan
In
Credit Agreement
On
Term Loan
The key elements of the term loan include (i) a term loan commitment up to
Revolving Credit Facility
The key elements of the revolving line of credit under the Credit Agreement
include (i) a revolving line of credit of up to
Additional details regarding the Credit Agreement are included in the section entitled "Notes to Consolidated Financial Statements - Note 5 - Debt" in the consolidated financial statements included elsewhere in this Form 10-K.
The Credit Agreement is secured by substantially all assets of the Company, except that the collateral does not include any intellectual property held by the Company, provided, however, the collateral does include all accounts and proceeds of such intellectual property.
The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, prepayment of other indebtedness, dividends and other distributions and transactions with affiliates. The Credit Agreement also contains financial covenants that require the Company to maintain a minimum net revenue threshold and a minimum backlog balance.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic and its follow-on effects have impacted and will continue
to impact business activity across industries worldwide, including
Due to pandemic-related factors including delays in service from our global
supply chain partners and travel and quarantine restrictions imposed by
government agencies and our customers in response to the spread of COVID-19, we
have experienced delays in installation of systems in
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commercial efforts with our customers has been disrupted due to the impact of COVID-19 on our customers. If the economic effects of the COVID-19 pandemic persist or travel restrictions are reinstated, our ability to conduct our business and access capital markets will be negatively impacted. Capital equipment sales, which make up the majority of our revenue and which were negatively impacted by the pandemic, may take longer than other areas of the economy to return to pre-pandemic levels, and this may continue to have a material impact on our business. The impacts of the COVID-19 pandemic have slowed, but they persist globally and may negatively impact our operations in areas that we are not aware of currently. See Item 1A "Risk Factors" for a discussion of certain risks related to COVID-19.
Impact of Inflation
In recent years, inflation has not had a significant impact on our operations. However, as inflation has increased over the past year, we are monitoring the potential impact on our business, including increases in product cost in connection with the parts used in our manufacturing process, freight and transportation costs, and wage pressure. Should the increase in inflation persist, it will likely increase the costs of conducting our operations, which would adversely impact our profitability. See Item 1A "Risk Factors" for a discussion of certain risks related to inflation.
New Orders and Backlog
New orders are defined as the sum of gross product orders, representing MRIdian contract price, recorded in backlog during the period. Backlog is the accumulation of all orders for which revenue has not been recognized and which we consider valid. Backlog includes customer deposits or letters of credit, except when the sale is to a customer where a deposit is not deemed necessary or customary. Deposits received are recorded in a customer deposit liability account on the balance sheet. Orders may be revised or cancelled according to their terms or upon mutual agreement between the parties. Therefore, it is difficult to predict with certainty the amount of backlog that will ultimately result in revenue. The determination of backlog includes objective and subjective judgment about the likelihood of an order contract becoming revenue. We perform a quarterly review of backlog to verify that outstanding orders in backlog remain valid, and based upon this review, orders that are no longer expected to result in revenue are removed from backlog. Among other criteria to consider for a transaction to be in backlog, we must possess both an outstanding and effective written agreement for the delivery of a MRIdian signed by a customer with a minimum customer deposit or a letter of credit requirement except when the sale is to a customer where a deposit is not deemed necessary or customary (i.e. sale to a government entity, a large hospital, group of hospitals or cancer care group that has sufficient credit, sales via tender awards, or indirect channel sales that have signed contracts with end-customers). We decide whether to remove or add back an order from or to our backlog by evaluating the following criteria: changes in customer or distributor plans or financial conditions; the customer's or distributor's continued intent and ability to fulfill the order contract; changes to regulatory requirements; the status of regulatory approval required in the customer's jurisdiction, if any; the length of time the order has been on our backlog; and other reasons for potential cancellation of order contracts.
During the years ended
Components of Statements of Operations
Revenue
Product Revenue. Product revenue consists of revenue recognized from sales of MRIdian systems, as well as optional components, such as additional planning workstations and body coils.
Following execution of an order contract, it generally takes nine to 15 months for a customer to customize an existing facility or construct a new vault for the purchased system. Upon the commencement of installation at a customer's facility, it typically takes approximately 45 to 60 days to complete the installation and on-site testing of the system, including the completion of customer test procedures. On-site training can take up to multiple weeks and can be conducted concurrently with installation and acceptance testing. Order contracts generally include customer deposits upon execution of the agreement, and in certain cases, additional amounts due at shipment or commencement of installation, and final payment due generally upon customer acceptance.
The Company recognizes revenue for the system at the point in time when delivery and inspection has occurred and installation revenue over a period of time as control of the installation services is transferred. For all contracts in which control transfers upon post-installation customer acceptance, revenue for the system and installation will continue to be recognized upon customer acceptance. For sales of MRIdian systems for which we are not responsible for installation, revenue is recognized when the entire system is delivered, which is when the control of the system is transferred to the customer.
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Service Revenue. Our contracts typically include a twelve-month warranty. In addition, we offer multi-year, post-installation maintenance and support contracts that provide various levels of service support, which enables our customers to select the level of on-going support services, including parts and labor, which they require. These post-installation contracts are for a period of one to five years and provide services ranging from on-site parts and labor, and preventative maintenance to labor only with a longer response time. We also offer technology upgrades to our MRIdian systems, when and if available, for an additional fee. Service revenue is recognized ratably over the term during which the contracted services are provided.
Distribution Rights Revenue. In
Cost of Revenue
Product Cost of Revenue. Product cost of revenue primarily consists of the cost
of materials, installation and services associated with the manufacturing and
installation of MRIdian systems, and royalty payments to the
We expect our materials, installation and service costs to decrease as we continue to scale our operations, improve product designs and work with our third-party suppliers to lower costs. We expect to continue to lower costs and increase sales prices over the coming years.
Service Cost of Revenue. Service cost of revenue is comprised primarily of personnel costs, training and travel expenses to service and perform maintenance on installed MRIdian systems. Service cost of revenue also includes the costs of replacement parts under maintenance and support contracts.
Operating Expenses
Research and Development. Research and development expenses consist primarily of compensation and related costs for personnel, including stock-based compensation, employee benefits and travel expenses. Other significant research and development costs arise from third-party consulting services, laboratory supplies, research materials, medical equipment, computer equipment and licensed technology, and related depreciation and amortization. We expense research and development costs as incurred. As we continue to invest in improving MRIdian and developing new technologies, we expect our research and development expenses to increase.
Selling and Marketing. Selling and marketing expenses consist primarily of compensation and related costs for our direct sales force, sales management, and marketing and customer support personnel, and include stock-based compensation, employee benefits and travel expenses. Selling and marketing expenses also include costs related to trade shows and marketing programs. We expense selling and marketing costs as incurred. We expect selling and marketing expenses to increase in future periods as we expand our sales force and our marketing and customer support organizations and increase our participation in trade shows and marketing programs.
General and Administrative. Our general and administrative expenses consist primarily of compensation and related costs for our operations, finance, human resources, regulatory, and other administrative personnel, and include stock-based compensation, employee benefits and travel expenses. In addition, general and administrative expenses include third-party consulting, legal, audit, accounting services, quality and regulatory functions and facilities costs, and gain or loss on the disposal of property and equipment. We expect our general and administrative expenses to increase as our business grows and as we invest in the development of our MRIdian Linac.
Impairment Charges. We assess our right-of-use ("ROU") assets for impairment
when there are indicators and compare the carrying amount of the ROU asset to
its estimated undiscounted future cash flows. If the estimated undiscounted
future cash flows are less than the carrying amount of the ROU asset, an
impairment calculation is performed. An impairment loss is recorded for the
difference of the ROU asset's carrying value that exceeds its estimated
discounted cash flows. In connection with our sublease of one of our
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Interest Income
Interest income consists primarily of interest income received on our cash and cash equivalents.
Interest Expense
Interest expense consists primarily of interest and amortization related to our indebtedness.
Other Income (Expense), Net
Other (expense) income, net consists primarily of changes in the fair value of
the warrants to purchase 1,720,512 shares of common stock that we issued in a
private placement in
The outstanding 2017 and 2016 Placement Warrants are re-measured to fair value at each balance sheet date with the corresponding gain or loss from the adjustment recorded as a component of other (expense) income, net.
Additional Financial Measures
We regularly review a number of metrics to evaluate our business, measure our progress and make strategic decisions. Adjusted EBITDA (the "non-GAAP financial measure") is currently utilized by management and may be used by our competitors to assess performance. We believe this measure assists our investors in gaining a meaningful understanding of our performance. Because not all companies use identical calculations, our presentation of this measure may not be comparable to other similarly titled measures of other companies. Refer "Non-GAAP Financial Measure" below for a definition and a reconciliation of net loss to adjusted EBITDA.
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Results of Operations
The analysis presented below is organized to provide the information we believe
will be helpful for understanding of our historical performance and relevant
trends going forward and should be read in conjunction with our consolidated
financial statements, including the notes thereto, in Part II, Item 8 "Financial
Statements and Supplementary Data" of this Annual Report on Form 10-K. Also
included in the following analysis are measures that are not in accordance with
The following tables set forth our results of operations for the periods presented (in thousands): Year Ended December 31, 2022 2021 2020 Revenue: Product$ 79,325 $ 51,865 $ 42,742 Service 22,368 17,779 13,800 Distribution rights 513 475 475 Total revenue 102,206 70,119 57,017 Cost of revenue: Product 71,238 51,780 49,347 Service 20,923 18,004 11,729 Total cost of revenue 92,161 69,784 61,076 Gross profit (loss) 10,045 335 (4,059) Operating expenses: Research and development 32,431 31,849 25,008 Selling and marketing 30,488 16,044 15,181 General and administrative 52,437 56,091 61,729 Impairment charges 1,816 - - Total operating expenses 117,172 103,984 101,918 Loss from operations (107,127) (103,649) (105,977) Interest income 1,686 13 791 Interest expense (5,057) (4,241) (3,307) Other income (expense), net 3,168 (2,171) 585
Loss before provision for income taxes (107,330) (110,048) (107,908) Provision for income taxes
- - - Net loss$ (107,330) $ (110,048) $ (107,908)
Comparison of the years ended
Revenue Year Ended December 31, 2022 2021 Change ($) Change (%) (in thousands) Product$ 79,325 $ 51,865 $ 27,460 52.9 % Service 22,368 17,779 4,589 25.8 % Distribution rights 513 475 38 8.0 % Total revenue 102,206 70,119 32,087 45.8 %
Total revenue during the year ended
Product Revenue. Product revenue increased by
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year 2022 as compared to fiscal year 2021. The Company recognized revenue for 16 MRIdian Linac systems, including one upgrade, during the fiscal year 2022, as compared to 10 MRIdian Linac systems during the fiscal year 2021.
Service Revenue. Service revenue increased by$4.6 million , or 25.8%, in fiscal year 2022 compared to fiscal year 2021 primarily due to the increase in installed base. Cost of Revenue Year Ended December 31, 2022 2021 Change ($) Change (%) (in thousands) Product$ 71,238 $ 51,780 $ 19,458 37.6 % Service 20,923 18,004 2,919 16.2 % Total cost of revenue 92,161 69,784 22,377 32.1 %
Product Cost of Revenue. Product cost of revenue increased by
Service Cost of Revenue. Service cost of revenue increased by
Operating Expenses Year Ended December 31, 2022 2021 Change ($) Change (%) (in thousands) Research and development$ 32,431 $ 31,849 $ 582 1.8 % Selling and marketing 30,488 16,044 14,444 90.0 % General and administrative 52,437 56,091 (3,654) (6.5) % Impairment charges 1,816 - 1,816 100.0 % Total operating expenses 117,172 103,984 13,188 12.7 %
Research and Development. Research and development expenses increased by
Selling and Marketing. Selling and marketing expenses increased by
General and Administrative. General and administrative expenses decreased by
Impairment Charges. In 2022, the Company recorded impairment charges of
Interest Income Year Ended December 31, 2022 2021 Change ($) Change (%) (in thousands) Interest income $ 1,686$ 13 $ 1,673 12,869.2 %
Interest income increased by
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Table of Contents Interest Expense Year Ended December 31, 2022 2021 Change ($) Change (%) (in thousands) Interest expense$ (5,057) $ (4,241) $ (816) 19.2 % Interest expense increased by$0.8 million in fiscal year 2022 compared to fiscal year 2021. The increase in interest expense is due to an increase in interest rates combined with higher principal amounts following the debt amendment that occurred inJune 2022 and the entry into the Credit Agreement inNovember 2022 . Other Income (Expense), Net Year Ended December 31, 2022 2021 Change ($) Change (%) (in thousands) Other income (expense), net$ 3,168 $ (2,171) $ 5,339 245.9 %
Other income (expense), net for fiscal year 2022 consisted primarily of a
Non-GAAP Adjusted EBITDA Year Ended December 31, 2022 2021 Change ($) Change (%) Non-GAAP adjusted EBITDA$ (78,230) $ (73,681) $ (4,549) (6.2) %
Non-GAAP adjusted EBITDA for the full year 2022 was a loss of
Non-GAAP Financial Measure
Management uses a non-GAAP measure of adjusted earnings before interest, taxes, depreciation, amortization and stock-based compensation ("adjusted EBITDA"). We define adjusted EBITDA as EBITDA (defined as net income before net interest expense, depreciation, and amortization), adjusted for impairment of assets, non-cash equity-based compensation, non-cash changes in warrant liability valuations, and non-recurring costs.
Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA:
•does not reflect any charges for the assets being depreciated and amortized that may need to be replaced in the future;
•does not reflect the significant interest expense or the cash requirements necessary to service interest or, if any, principal payments on our debt;
•does not reflect the impact of write-downs of long-lived assets;
•does not reflect the impact of share-based compensation upon our results of operations;
•does not reflect the impact of changes in fair value of our warrant liabilities; and
•does not include certain expenses that are non-recurring, infrequent and unusual in nature.
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Table of Contents The following table provides a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP measure, for each of the periods presented:
Reconciliation of GAAP Net Loss to Adjusted EBITDA (in thousands) Year Ended December 31, 2022 2021 GAAP net loss$ (107,330) $ (110,048) Depreciation and amortization 4,922 5,984 Stock-based compensation 21,608 23,871 Interest expense 5,057 4,241 Interest income (1,686) (13) Loss (gain) on fair value of warrants (a) (2,617) 2,284 Impairment (b) 1,816 - Adjusted EBITDA (78,230) (73,681) _________________
(a) consists of non-cash gain/losses related to our 2017 and 2016 Placement
Warrants.
(b) consists of a one-time non-cash impairment charge on the right-of-use assets
and related furniture and fixtures of one of our
Liquidity and Capital Resources
Since our inception in 2004, we have incurred significant net losses and
negative cash flows from operations. During the years ended
At
We expect that our existing cash and cash equivalents, together with proceeds from the sales of MRIdian systems, will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, and contractual obligations for at least the next twelve months. However, we continue to critically review our liquidity and anticipated capital requirements in light of the significant uncertainty created by the COVID-19 pandemic and current economic conditions.
We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet long-term operating needs. Adequate additional funding may not be available to us on acceptable terms or at all. In addition, although we anticipate being able to obtain additional financing, we may be unable to do so. Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations. Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth in the section titled "Risk Factors."
The following table summarizes our cash flows for the periods presented (in thousands):
Year Ended December 31, 2022 2021 2020 Cash used in operating activities$ (91,708) $ (62,091) $ (63,474) Cash used in investing activities (3,898) (1,559) (6,183) Cash provided by (used in) financing activities 18,293 125,278 (350)
Operating Activities
We have historically experienced cash outflows as we developed MRIdian with Cobalt-60 and MRIdian Linac and expanded our business. Our primary source of cash flow from operating activities is cash receipts from customers including sales of MRIdian systems and, to a lesser extent, up-front payments from customers. Our primary uses of cash in operating activities are amounts due to vendors for purchased components and employee-related expenditures.
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During fiscal year 2022, cash used in operating activities was
During fiscal year 2021, cash used in operating activities was
Investing Activities
Cash used in investing activities during the year ended
Financing Activities
During the year ended
During the year ended
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with accounting
principles generally accepted in
In addition to the accounting policies that are more fully described in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, we consider the critical accounting policies described below to be affected by critical accounting estimates, and those estimates have the greatest potential impact on our consolidated financial statements. Such accounting policies require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ from these estimates.
Revenue Recognition
Our revenues are derived primarily from the sale of MRIdian systems, installation of the MRIdian system, and support and maintenance services on sold systems. The MRIdian system and installation of the MRIdian system are considered two distinct performance obligations.
For contracts in which control of the system transfers upon delivery and inspection, the Company recognizes revenue for the systems at the point in time when delivery and inspection by the customer has occurred. For these same contracts, the Company recognizes installation revenue over the period of installation as the installation services are performed and control is transferred to the customer. For all contracts in which control continues to transfer upon post-implementation customer acceptance, revenue for the system and installation is recognized upon customer acceptance.
Certain customer contracts with distributors do not require
For sales of the related support and maintenance services, a time-elapsed method is used to measure progress toward complete satisfaction of performance obligations and service revenue is recognized ratably over the service contract term, which is typically 12 months.
We frequently enter into sales arrangements that contain multiple performance obligations including MRIdian system and product support. Judgments as to the standalone selling price and allocation of consideration from an arrangement to the individual performance obligations, and the appropriate timing of revenue recognition are critical with respect to these arrangements. Changes to the performance obligations can impact the arrangement and amounts allocated to each performance obligation could affect the timing and amount of revenue recognition.
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Stock-Based Compensation
Stock-based compensation expense is measured and recognized in the consolidated financial statements based on the fair value of the awards granted. We use the Black-Scholes option-pricing model to estimate the fair value of our stock-based awards including: restricted stock units ("RSUs"), deferred stock units ("DSUs"), performance share units ("PSUs"), employee stock purchase plan ("ESPP"), and stock options. This valuation model requires the input of highly subjective assumptions, the most significant of which is our estimates of expected volatility and the forfeiture rate of the award. The Company determines volatility based on the Company's own historical volatility measurements. The forfeiture rate of stock awards is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures have been estimated by the Company based upon historical and expected forfeiture experience.
Furthermore, PSUs are based on our corporate financial performance targets of the Company's compound annual revenue growth rate over a three-year period. The number of PSUs that will ultimately be awarded are contingent on our actual level of achievement compared to the corporate financial target performance targets.
The assumptions used in calculating the fair value of stock-based payment awards represent management's best estimates. These estimates involve inherent uncertainties and the application of management's judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.
Common Stock Warrants
We issued the 2017 and 2016 Placement Warrants in connection with the 2017 and 2016 Private Placements. The 2017 and 2016 Placement Warrants were accounted for as a liability with subsequent changes in fair value recorded in other income (expenses), net at each reporting date until the warrants are exercised or expired. The Company valued the 2017 and 2016 Placement Warrants at issuance using the Black-Scholes option pricing model and determined the fair value. The key inputs to the valuation model included expected volatility, risk-free rate, and an expected term.
Inventory Valuation
Inventory consists primarily of purchased components for assembling MRIdian systems and other direct costs associated with MRIdian system installation. Inventory is stated at the lower of cost or net realizable value. When the net realizable value of inventory is lower than related costs, we reduce the carrying value of inventory for the difference while recording a corresponding charge to cost of product revenues. The assumptions we used in estimating the net realizable value of the inventory primarily include the total cost to complete the applicable MRIdian system.
Recently Issued and Adopted Accounting Pronouncements
We review new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. For the recently issued accounting standards that we believe may have an impact on our consolidated financial statements, see the section entitled "Notes to Consolidated Financial Statements - Note 2 - Summary of Significant Accounting Policies" in the consolidated financial statements.
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