ViewRay, Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the ViewRay Third Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Michaella Gallina, Senior Director, Investor Relations and Communications.

[Michaella Gallina:]

Thank you, Bridget, and welcome to ViewRay's third quarter 2018 financial results conference call. Joining me from ViewRay are President and Chief Executive Officer, Scott Drake; and Chief Financial Officer, Ajay Bansal. Earlier today, ViewRay released financial results for the quarter ended September 30, 2018, which can be found on the Investor Relations portion of our Web site. Before we begin, I'd like to remind you management will make statements during this call that include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a list and description of those risks and uncertainties, please see the company’s filings with the Securities and Exchange Commission. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 8, 2018. The company undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. With that, I will now turn the call over to Scott.

[Scott Drake:]

Thanks, Michaella, and good afternoon, everyone. On today’s call, I will first provide impressions 90 days into my tenure. I’ll share context on customer feedback, strategy development and progress we’ve made building our team. Ajay will share financial and operational highlights and we'll open the line for questions. In my first week on the job, I shared two major observations with investors. First, that we have a tremendous opportunity to become the standard of care in radiation oncology; and second, there’s a ton of work necessary to capitalize. I believe both of these statements to be profoundly true and the scope of the work ahead of us is even more clear. Let me give you insight into each of these observations; first, on changing the standard of care. Key opinion leaders are united that the market is heading in the direction of real-time on-table adaptive therapy enabled by MRIdian. The ability to see clearly and shape the dose allows for tighter margins and reduced treatment volumes that mitigate healthy tissue toxicity. Our system allows for broad utilization of hypo-fractionated treatments, strikes automatically when the tumor is within plan objectives and aid safe dose escalation. This expansive capability set opens the door for benefits to improve patient outcomes, shorter treatment times, increase patient throughput and favorable healthcare economics. Let me cite a few examples to make the point. Dr. Siddiqui from Henry Ford presented at the Miami Symposium a few weeks ago. He showed a video of treating a tumor right next to the patient’s beating heart and said, “This would have been unimaginable before MRIdian.” He added that this was a patient that would have been sent home without treatment had it not been for ViewRay. Dr. Lagerwaard at Amsterdam UMC shared that he and his team performed real-time on-table adaptive treatment virtually 100% of the time with MRIdian. It is simply the way to treat according to their world-class team. Finally, at ASTRO, Dr. Steinberg stated “The integration of MRI with adaptive radiotherapy represents the next generation in radiation oncology and a potential new standard of care.” He went on to emphasize that the patient, clinical and economic benefits are highly attractive to all stakeholders. Along with our customers, patients are increasingly seeking our system. Last week we heard from a woman with a family member suffering from cancer. The patient had a large tumor in her abdomen and endured several rounds of conventional radiation therapy that resulted in extreme pain, fatigue and other complications. She had the tumor surgically removed along with a kidney and gallbladder. Later, another tumor was found in her pancreas. Her doctors told her she could have no more radiation therapy due to the risk of liver and kidney failure, and she was told to go home and enjoy her life while she could. Fortunately her family had heard of MRIdian’s capabilities and sought out Henry Ford Hospital in Detroit. Her treatment on the MRIdian system has been successful. The tumor on her pancreas has been effectively treated and no new tumors are present. MRIdian gave her precious hope, time and quality of life. The family is ecstatic. Our patient and customer feedback are illuminating and motivating, but let me be very clear about the work required to capitalize on the opportunity. We are in the early process of driving this company from a start-up phase and mentality to a more mature organization focused on delighting teammates, customers and shareholders. Strategically, we’re shifting from a mindset of selling capital equipment to creating a pull of therapy adoption. We are working to increase the force of the pull and are paying close attention to customer feedback. Our customer willingness to recommend score is a world-class 94. That said, customers are aligned that we must continue to improve system reliability and clinical workflow. One thought leader compared MRIdian to a smartphone. He stated that as we moved away from landlines, we were tolerant of a kludge app because the smartphone represented such profound benefits. Similarly, customers give us these high marks that are clear that we must make continuous improvements. We are delighting early users but to drive broad adoption we must nail these issues. Our primary work streams are directly in response to this feedback. The depth and breadth of this work is proportional to the opportunity in front of us and it will take time. We are building a world-class team and have hired new leaders in our commercial, clinical, quality, regulatory, legal, HR and operational functions. Attracting, retaining and developing top talent is a daily priority. All of my direct reports are now in place and each leader is in the process of building out their respective team. We are driving process rigor and building functional capability brick-by-brick. Our organization will be faster and more capable as this process unfolds. From a balance sheet perspective, we have put ourselves in a solid position. We finished the quarter with just over $200 million on hand. Building our team and driving our work streams will increase our operating costs. We have our eye on expenses and are looking for ways to mitigate cash consumption. On the reimbursement front, we are pleased with the new ASTRO, ASCO and AUA joint guidance regarding prostate cancer. The new guidance recognizes and reinforces that higher doses in fewer fractions is highly desirable. When delivering hypo-fractionated doses, the treatment must be more accurate and precise. MRIdian is uniquely positioned to deliver tight margins and lower treatment volumes. It is validating that reimbursement trends are moving in our direction. Final point, we are unleashing the greatest strength of our company, our innovation team unlike ever before. We have market leading technology and our position must be protected and extended. Groundbreaking work is underway to drive meaningful advances for patients and customers. With that, I’ll turn the call over to Ajay for financial and operational highlights.

[Ajay Bansal:]

Thank you, Scott, and good afternoon, everyone. In the third quarter, we recognized revenue on three MRIdian Linacs and recorded total revenue of $17.7 million, up from $12.2 million in the third quarter of 2017. Total cost of revenue was $17.3 million for the third quarter compared to $10.2 million in the same period last year. For the quarter, overall gross margins were 2% and product gross margins were 8%. Product gross margins were impacted by one-time items totaling approximately $3 million. Excluding these items, product gross margins would have been 22%. Net of severance-related expenses of $5 million, our operating expenses in the third quarter of this year totaled $19.5 million. In comparison, our operating expenses were $13.6 million in the same period last year. We expect to continue to see an increase in our operating expenses as we build our commercial and operational infrastructure and invest in innovation. Net loss for the third quarter was $33.9 million compared to $11.2 million for the same period last year. Net loss in the third quarter of this year was impacted by the $5 million severance charge that I mentioned before, as well as a $6.7 million change in fair value of warrant liabilities. Let me now turn to orders and backlog. In the third quarter, we received new orders for MRIdian Linacs totaling $36.2 million. These include the orders we recently announced from GenesisCare. GenesisCare is the largest private provider of cancer services in Australia and a leader in cancer treatment throughout the UK and Spain. We are proud to be partnering with them. At the end of the quarter, our backlog stood at approximately $201 million, roughly at the same level as the backlog at the end of the second quarter of this year. In the third quarter, we removed three systems from our backlog. Let us now look at our cash position, cash usage and revenue guidance. In terms of our cash position, we ended the quarter with cash and cash equivalent of $201.5 million. Our cash position was strengthened significantly by our follow-on equity offering that was completed in August. During the third quarter, our cash usage was $27 million. For the full year, we expect our cash usage to be about $115 million versus $100 million that we had previously communicated. This is driven primarily from building inventory ahead of 2019 as well as expenses associated with our infrastructure build out. For the full year, we are updating our revenue guidance to $80 million from our previous guidance of $80 million to $90 million. We had anticipated four installs to be completed in the fourth quarter, however, one site experienced flooding prior to its final signoff and this installation is now expected to be completed in 2019. With that, we would now like to open up the call for Q&A.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from the line of Anthony Petrone with Jefferies. Your line is open.

[Anthony Petrone:]

Thanks and good afternoon. Maybe we could begin with, Scott, you mentioned the guideline changes around prostate and we’ve seen a couple of other bulletins out of ASTRO. So I’m just wondering it’s still early days there, but how much discussion has the company had around these guideline changes? What do you think it means in terms of just general interest in MR-Linac category, but specifically MRIdian heading into '19? And then I’ll have a couple of follow ups.

[Scott Drake:]

Yes, sure, Anthony. Thanks for the question. I would say that we see the direction of the prostate guidelines obviously as a very good development and having alignment across those three August [ph] groups is very nice to see. I think guidelines overall are going to be taking us more and more in the direction of SBRT treatment and I think MRIdian has very unique capability in terms of delivering tighter margins and lower treatment volume, which is really what you’re trying to accomplish in an effective SBRT treatment. So I feel really good about that. There was clearly some confusion coming out of ASTRO but I believe that has more or less settled out in the marketplace. I think we know what’s required to build for re-planning those four elements of a new image, re-contouring, dose calculation and plan verification. All of that is in place and not new. What I think people are trying to get their arms around is what is new and that’s the MRIdian system. So instead of that whole process taking any number of days or even a full week, we’re able to do that literally while the patient is on table. So we think the market is heading toward hypo-fractionated treatments. We think we’re right in line with where the market wants to go and we’re not going to be sharing any detail in terms of what our specific efforts are on that front at this time, Anthony.

[Anthony Petrone:]

Fair enough. And maybe just switch gears a bit to orders and backlog, first on orders. The company announced agreement with GenesisCare. Congratulations on that announcement. Maybe just a little bit on how that specific sort of tender plays out, maybe details around orders or timing that would be helpful? And then on backlog, I recall last quarter that some of the dropouts were cobalt related. And was that the case this quarter as well? And at what point do you think the backlog stabilizes in terms of sort of those legacy systems that have to be shifted out? Thanks again.

[Scott Drake:]

Yes, happy to. Let me flip the order and touch on the backlog real quickly. So we had three systems come out this time as we noted. There was no loss of orders per se. It’s just us supplying the criteria that I think I highlighted on the last call. So that’s just us being prudent and disciplined as it relates to our backlog. As it relates to GenesisCare, we’re incredibly excited about that opportunity. I was on the phone with one of the senior executives at Genesis just yesterday. We had a team there this week culminating in a pretty large meeting that we had with them yesterday. We’re incredibly positive about the opportunity to partner with them. I feel as though we’ve got to earn the right to broaden that. We will certainly be working to do it. I’ll be in London with their senior team here before the end of the calendar year and potentially another trip in Q1. But I think we’ve got to earn a broader partnership with them. We’re keen to do that and very appreciative of the business that we’ve earned with them thus far.

[Anthony Petrone:]

Thank you.

[Scott Drake:]

Thank you.

[Operator:]

And our next question is from Difei Yang with Mizuho Securities. Your line is open.

[Difei Yang:]

Hi. Good afternoon. Thanks for taking my questions. So, Scott, how do you think about – you were talking about system reliability and how the process works at the client side. Are there some ideas or plans on how that can be improved and the rough timeframe that we could possibly see results?

[Scott Drake:]

Yes, thanks so much for the question. I want to be really clear here. We’re operating in line with industry uptimes which as you know is a common metric that all of us use in this industry, but we do it today in a pretty labor-intensive way. The customer feedback that we’ve received that we’re responding very intensely to is regarding clinical workflow, ease-of-use issues and fully leveraging the capability of the MRIdian. Case in Point and I think you’re aware of this, but we have one customer that performs on-table adaptive treatment virtually 100% of the time. And we have other customers that use the full system capability relatively infrequently. So we’ve got a lot of work there in front of us. We have project teams that are dedicated to this work. And we expect to make very substantial progress in 2019. And with that progress I think we will see new capability brought to MRIdian again in calendar year 2019.

[Difei Yang:]

Okay. Just to follow up on the question, then if you think about those plans for 2019, would you try to service those clients that already have MRIdian on site, up and running, or would you try to prioritize the new orders first?

[Scott Drake:]

Yes, I think the priority that we have is, number one, servicing the customers that we have today and delighting them. We have share values that we’ve developed as a team and one of them is a radical customer delight. And we are – you see the cash use increase. That is in part to put parts and inventory in places around the world to delight those customers. We will get much more efficient with that over time and that is a top priority of the company. I think you and I talked at the ASTRO meeting if I’m not mistaken and I told you that the leading metric that I’m probably most keenly interested in is orders. I think both of those are critically important. We’re building a commercial team that’s much larger than what we had previously; highly, highly capable people that are joining us. I’m thrilled to have them. I think it’s going to take a while to get that team fully in place, trained and effective. So I wouldn’t expect very near term dramatically different results but I am looking for improvements on a quarterly basis moving forward. So I think that’s kind of the big picture of how we’re looking at the business as we go forward. And obviously installations are important to us, but we’re taking a more engineering intensive stance on that, I would say, and doing it in less of a hurry and trying to get it right. So I think that’s important context for investors to have as well.

[Difei Yang:]

Thank you so much. And my final question is on financials. With the current cash balance, do you see this is – even with the sales force expansion, with additional engineering resources, do you see this is adequate amount of cash to get to a breakeven point?

[Scott Drake:]

Yes, I would say from my perspective and Ajay may want to weigh in here on this as well. I think we’re in a very good place from a balance sheet perspective. I think it’s important to point out probably obviously that we’re driving the company, as I mentioned, from kind of a startup mentality to a more mature organization and strategically moving toward therapy adoption versus just selling capital, if you will. We definitely have our eye on the ball from an expense management standpoint, although our operating expenses will be increasing here in the short run and we’re looking at ways that we can mitigate cash consumption. And I would say going forward, to your point trying to project forward, the capital needs of our business will be determined primarily by how effectively we drive orders going forward. So I think we’re in a very good position. I don’t want to get out ahead of myself. And let me invite Ajay to make any comments that he might like to make.

[Ajay Bansal:]

Just as Scott said, Difei, the biggest driver of all of this is going to be how we drive orders and adoption.

[Difei Yang:]

Thank you both.

[Scott Drake:]

Thank you.

[Ajay Bansal:]

Thank you.

[Operator:]

And our next question is from Craig Bijou with Cantor Fitzgerald. Your line is open.

[Craig Bijou:]

Hi, guys. Thanks for taking the questions. Maybe start with just, Scott, on – I appreciate that you guys are focusing on the orders going forward and that you want to maybe sequentially or quarterly improve those orders. I guess I want to just kind of get a sense for how you see installations playing out? And I’m not sure if that is reducing – if the question or the answer is reducing installation time, but obviously installation drives revenue. So it’s kind of how – also I guess how we think about revenue over the next couple of years. But, I guess, what are some of the assumptions that you have for how you guys will be able to get the installations going forward?

[Scott Drake:]

Yes, I think – Craig, thanks for the question. I think the way that we’re thinking about it is, number one, big picture. Let’s build an organization that has the capability worthy of the opportunity in front of us and worthy of the fact that I very deeply believe we have the opportunity to re-standard of care. And so a lot of my time and effort is spent building that team capability and processes as the organization speeds up and our order book speeds up that we’re prepared to install at the rate that I believe we’re going to have to install in the future if we’re as successful as we anticipate being. So a lot of the focus now is on pouring that foundation and getting ready for that inflexion point that we very much anticipate and hope for out into the future. From a short-term perspective, I think getting the installation right is very important as opposed to doing it fast. The focus of the team heretofore has been, and with a small team by the way, go get the installation done and you got to hurry up and get to the next site and do that installation as opposed to having the right capacity and bandwidth organizationally to be able to do multiple installations concurrently, not wear out the team and get the engineering right the first time and once. So it’s just taking that bigger picture perspective and building out that capacity. I don’t want anybody to think that we’re backing off at all from an orders’ perspective. I fully anticipate that our commercial team is going to become more capable and more effective over time. I don’t think it’s going to be a flip of the switch. I don’t want to set that expectation. But I want you to know that we’re building a team that we believe is worthy of the opportunity in front of us.

[Craig Bijou:]

Great. That’s helpful. And then maybe on – there’s been some noise today or news I guess Alex Azar and CMS potentially doing a mandatory bundled payment program for radiation oncology. So I guess, Scott, just wanted to get your – one, do you know what could be included in the episodic payment? And then two, how ViewRay could be a headwind or possibly a tailwind for you guys if there was an episodic payment?

[Scott Drake:]

Yes, I think it’s too soon for me to answer with any kind of clarity in terms of any late-breaking news like that. I would tell you and you guys probably heard from Dr. Steinfort from UCLA at ASTRO talking about the economic benefits of what the MRIdian system enables. When you’re taking care down to hypo-fractionated treatment and able to treat patients in five days versus weeks and do so that much more effectively with fewer and fewer side effects, I think we are incredibly well positioned for what might be the future of healthcare delivery. I think healthcare economics and clinical outcomes very much favor what we have offered and are offering our customers. So I feel like we’re very well positioned there, but I don’t want to get out ahead of ourselves with anything on late-breaking news.

[Craig Bijou:]

Great. Thanks for taking the questions.

[Scott Drake:]

Thank you, Craig.

[Operator:]

And our next question comes from the line of Suraj Kalia with Northland Securities. Your line is open.

[Suraj Kalia:]

Good afternoon, gentlemen.

[Scott Drake:]

Good afternoon, Suraj.

[Suraj Kalia:]

Hi. So, Scott, just jumping around between calls and forgive me if you’ve already mentioned this, how many installation teams do you’ll have in place currently?

[Scott Drake:]

Yes, we’re not getting into that level of granularity, Suraj, in terms of the number of people or installed teams. I recognize that the company provided some information on that previously. But we’re just not going to get into that level of granularity on that front or on the commercial team front. But what I would share that I think is highly relevant is that we’re building a team anticipating the kind of demand that I believe they’re going to be able to drive in the not too distant future and we’re being thoughtful about what future bottlenecks might be. So I would say we’re being thoughtful about that but not being granular in terms of the number of team or teammates for that matter.

[Suraj Kalia:]

And are you going to mention the average days for installation per system? Because I remember at one point it was closer to 60 days and the goal was existing FY '18 probably come down to the 30 to 45-day mark. Any color there?

[Scott Drake:]

Yes. Again, I think that level of granularity – I know the company provided it. I will tell you that I believe from an installation standpoint we are going to become significantly more effective and efficient overall. We have hired a VP of customer readiness who is highly capable on this front. He is building out his team. And we are concurrently augmenting the installed team and the service team, all of that work in parallel. But as it relates to the specific number of days, I don’t think we’re going to be reporting out on that. But I think over time you will see our pipeline develop and I think those overall times from PO to revenue recognition will come down meaningfully.

[Suraj Kalia:]

Got it. And Ajay in terms of gross margins, I remember vaguely about a 30% or so gross margin exiting FY '18. Have you’ll given any additional color on that, because product gross margins in the quarter was slightly softer than what we were expecting. Any color would be great? Thank you for taking my questions.

[Ajay Bansal:]

Thank you, Suraj. Yes, as we mentioned, product gross margins this quarter excluding the one-time items were about 22%. While we see getting to industry gross margins in the coming years, our focus right now is all of the elements that Scott mentioned. We have a very strong team that is very capable of driving the cost out of our system. But first we want to focus on some of the other things that Scott talked about and then we’ll turn to gross margins and get to industry gross margins on the product side in the coming years. But that’s not our primary focus right now.

[Suraj Kalia:]

Got it. Thank you.

[Scott Drake:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question is from the line of Jason Bednar with Baird. Your line is open.

[Jason Bednar:]

Thanks. Good afternoon, everyone. Scott, you mentioned a few different times that there’s still a lot of work to do and I think we all appreciate that. But beyond orders and backlog, what are the other operational milestones you’d point us to or items that you’d counsel us to measure your progress on with these various initiatives you have in place over the coming quarters?

[Scott Drake:]

Yes, Jason, I think orders is a big one and we’re shining a bright light on that internally obviously and with investors as well. I think that’s critically important and that will show how our customers are voting with their pocketbook. I think that’s an incredibly important metric. We also track very closely our customer willingness to recommend score and that is going to quantify how well we’re delighting them in terms of these work streams that we’ve identified. And I think the third way that is going to be highly relevant is innovation. I mentioned that we’re unleashing our innovation team unlike ever before. Our hope is that we’re going to see some meaningful advances launched into the field in the 2019 timeframe. For competitive reasons, I’m not going to share specifically what those things are. But we have quite a pipeline not only next year but in the '20, '21, '22 timeframe as well. So I think orders is a big one. How are we delighting our customers and how are we delivering on innovation as we go forward? We will also certainly be updating all of you how our SMART study is going. And I think the clinical work that our customers are doing is worthy of paying attention to. And then as Ajay said I think on the last question, at the right point in time we’ll be turning our team toward gross margin expansion. But in the short run I would pay attention to those other items.

[Jason Bednar:]

Okay, that’s real helpful. You actually touched on my – one of my next questions which was what to expect from maybe a new product or software standpoint, but since you addressed that and it doesn’t sound like you’re giving any more color just yet, maybe just one other one for me then instead. You seem to suggest, previously on the last call, an openness for maybe more creative or nontraditional arrangements with hospitals and I know we’re seeing [indiscernible] players create some unique structures to limit that upfront financial commitment and shift maybe the payment stream to a long-term commitment of some description. I know that’s a little more challenging to implement with radiation equipment, but just curious if you could expand upon some examples you’d potentially consider as an alternative to evolve and soon to be the traditional contract structure.

[Scott Drake:]

Yes. We’re certainly open. I would say that. I think that’s the broad premise. We are really interested in learning from our customers and what is going to truly delight them. I would tell you 90 days into the role, I am very optimistic in terms of the value that our customers see in our system; from a feature and benefits standpoint, from a clinical standpoint and in terms of the ROI of this system. So I feel pretty good about where we’re at there, Jason. I will certainly learn more in the months and quarters ahead, no double about that. But my early indicators are that I feel like our system provides real value to our customers and I think they’re willing to pay for it. But I’ll keep you apprised there.

[Jason Bednar:]

Okay. Thanks for taking the questions.

[Scott Drake:]

Thank you.

[Operator:]

Thank you. We do have a follow up from Andrew D’Silva with B. Riley FBR. Your line is open.

[Andrew D’Silva:]

Hi. Thanks for taking my questions. Sorry, I was jumping between calls. It’s a busier day in earnings season here. First question just to Ajay and in case – if you answered this just let me know and I can listen to the transcript later. But can you tell me what depreciation and amortization, cash flow from operations, stock-based compensation and CapEx were for the quarter?

[Ajay Bansal:]

Yes, sure, Andy. So our depreciation and amortization was just south of $1 million, so very close to $1 million. Stock-based compensation was $7.2 million for the quarter and that included the severance-related charges. So we had about $5 million of severance-related charges; $3.7 million of that was stock-based compensation, so that’s included in the $7.2 million stock-based comp number. Then we had amortization of debt discount of $900,000 or thereabout. And then PP&E; purchase, property and equipment was roughly $0.5 million. Our cash flow from – cash used in operating activities was $28.5 million.

[Andrew D’Silva:]

Perfect. Thank you so much for that. And I got a couple of questions just related to the broader market. So the first one, I’m just kind of curious how you’re viewing the competitive landscape right now. I obviously went to your Symposium back in September. A lot of radiation oncologists I talked to were very impressed with the technology and many of them were talking about artificial intelligence and if it could be implemented in this and how beneficial it would be. And then at ASTRO, Varian was really discussing their AI. It’s like a multimodality adaptive radiotherapy treatment. And they were talking about integrating with all kinds of different imaging technologies from the CT to MRI to PET. And it seems like what they were implying was with legacy systems they could enhance visual capabilities through AI without necessarily having to move over to MR and I was kind of curious on your thoughts there?

[Scott Drake:]

Yes, Andy, I would say – I guess to stipulate upfront, I’m very impressed with Varian and their team. As the market leader, we tip our hat to them. But if you take a step back and you think about first principles, when you re-plan, the objective is to adjust the dose to the new location of the tumor and organs at risk and this is all about tightening the margins and smaller treatment volumes, what I hear from customers repeatedly is that you can improve from current state of CT but only slightly no matter how good you get at CT. Maybe on a scale of 1 to 10, you take it from a 2 to a 3 versus a 9 or a 10 with MRI and they frequently ask me rhetorically if you can’t see, what are you adapting to? So I don’t take anything that they do lightly. But I would tell you we feel very good about the feature set that we have. Feedback from customers I think to your point is incredibly positive and we’ve got work to do on the usability and clinical workflow of the system. But I think we’re on the right path.

[Andrew D’Silva:]

Okay, great. And then just kind of a two-part question related to China first. I believe you got one or two systems that have been shipped there. I was curious where they are in the installation process? And then Accuray had their conference call earlier. Obviously stock got a massive bump when they were talking about the different type process of radiation oncology equipment that’s being opened up there for new installs. And I was curious if you would qualify for any of that if you’re able to get approval in the near term?

[Ajay Bansal:]

Yes, so the China quota that came out I believe was through 2020. And as you know, Andy, our cobalt system is approved in China but we are no longer installing any cobalt systems. In fact, we are in the process of upgrading several of the ones that are already installed. With respect to the MRIdian Linac, of course – as you know, it’s approved in the U.S. and we have CE Mark for that and it has Shonin approval as well in Japan, but we do not yet have approval of our Linac system in China. That will take some time. So we don’t expect to benefit from the quota that was announced through 2020. But going forward it’s really encouraging to see that the quota for class A devices is expanding. So when we do get the approval in the coming years, that should help us a lot.

[Andrew D’Silva:]

Okay, got it. Perfect. And then just two more questions. Thinking about the backlog in and out as far as the three systems that were moved, can you give a little bit of context as far as what happened there? Is it the time for them to actually be able to get the equipment installed in the facilities too long for them to actually make that kind of a decision, or was it something systemic going on within their institution that maybe it’s not necessarily directly tied to what’s going on with you?

[Scott Drake:]

Yes, I think it’s more the former, Andy. It became more of an aging issue from our criteria standpoint. We still have the orders. I mentioned that on the call, you may have missed that, earlier. But the orders are still in hand but it’s gotten to a point from an aging standpoint that we think it’s prudent to take them out.

[Andrew D’Silva:]

Okay, that makes sense. And then last question, I believe one of the previous callers briefly touched on this, but I’m just a little bit curious on what your capacity constraints are right now? And I’m not necessarily wondering how many systems you’re going to be installing next year or – I’m more curious, are you seeing it more in the supply chain with magnets that you’re getting in or you’re seeing it more on the installation side? And then what are you planning on doing to be able to expand that in the supply side if that is the major issue? Because obviously you’re dealing with pretty big companies that kind of hover around your space as well and it might not be easy to have them be able to provide you with the parts that you need and the capacity that you want to fulfill that growing backlog?

[Scott Drake:]

Yes, I think – let me make sure I’m on point here with the question. There’s not a gating factor at this point in time that’s slowing us down either in terms of component parts or installed team as it relates to the number of installations that we’re doing. We’re looking, as I’ve said, to create more demand and we’re focused on that. We are building a larger quality supply department so we are more proactive with our suppliers. Some of the items that we have are relatively long lead time and we’re looking to build partnerships with our suppliers that anticipate the kind of demand that we believe we’re going to be able to drive out into the future and make sure we have visibility going back further in the supply chain. But I wouldn’t say that today there’s any constraints on that front. From time-to-time we certainly tackle those kinds of issues. You mentioned magnets and again from time-to-time it’s one issue or another which is quite typical in the manufacturing space, as you know. But there’s not any limitation at this moment in terms of the installations that we’re doing.

[Andrew D’Silva:]

But you essentially have a pretty good idea at this point what you could possibly do next year? Like next year is already shaped out based on those lead times at this point, or is that incorrect and you’re actually able to kind of wing it more closely in the time period than I’m thinking?

[Scott Drake:]

No. I think you’re roughly right. I think a good bit of next year is baked from an installed standpoint with the orders that we have in hand. There are distributor orders that happen throughout the year where the distributor is on the hook for the install and we may recognize revenue from that distributor in that moment of receiving that order. But I think you’re thinking about it accurately.

[Andrew D’Silva:]

Okay, great. Perfect. I’ll take everything else offline. Thank you so much for the time.

[Scott Drake:]

Thanks, Andy.

[Operator:]

Thank you. Our last question is from Anthony Petrone with Jefferies. Your line is open.

[Anthony Petrone:]

Thanks. Scott, maybe just – you mentioned the SMART study. Maybe anything just in terms of enrollment that you can provide us where it sits and sort of just timing on readouts. It strikes us that it potentially will play out such that we would get maybe a one year look at the data, an early look at the data maybe next year’s ASTRO and then obviously a final reading in the following year. Is that accurate?

[Scott Drake:]

Yes, I would say – I think I said publicly previously that we anticipated enrolling our first patient here imminently. We have hired a new VP of clinical quality and regulatory who is world class. She has run many, many prospective randomized studies, spent a good bit of her career in the PMA space. So we’re working a little bit more deeply with the sites at the moment. We’re taking a look at building out the right capacity for that study. So we’ve kind of slowed that down a little bit so we can be more effective and efficient going forward. So I think it’s a little bit premature for me to call too much on that particular front. Ajay, is there something you want to add?

[Ajay Bansal:]

Yes. I just wanted to say, Anthony, of course the SMART study is going to be an important vehicle for us. But also if you were at ASTRO you might have seen a number of – as well as the Miami Symposium, a number of the sites that have MRIdian machines are generating spectacular prospective data now on their own as well. So SMART would be one important piece of the data, but we would have many more data points coming out of institutions who are doing work on their own.

[Anthony Petrone:]

Thanks.

[Scott Drake:]

Thank you.

[Operator:]

Thank you. I’m not showing any further questions. So I’ll now turn the call back over to Scott Drake, President and CEO, for closing remarks.

[Scott Drake:]

Thank you so much for joining us this afternoon on this call. We look forward to updating you in another 90 days. Thanks so much, everyone. Happy Thanksgiving.

[Operator:]

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.