##### 



UNITED STATES 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 September 30, 2007
 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
 Wisconsin
    
    39-1914727(State of other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 
 þ o
  o o þ
 o þ




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##### 



PagePart I  Financial Information
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28Part II  Other Information
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. Submission of Matters to a Vote of Security Holders
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44Signatures
    
    
    45Index to Exhibits
 2




---



##### 



PART I FINANCIAL INFORMATION
 Item 1. Financial Statements
 TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCash and cash equivalents
    
    $
    184,586
    
    
    $
    20,137Accounts receivable
    
    
    38,851
    
    
    
    19,050Inventories
    
    
    56,432
    
    
    
    40,026Deferred tax assets
    
    
    2,279
    
    
    
    5,982Prepaid expenses and other current assets
    
    
    2,052
    
    
    
    1,014Total current assets
    
    
    284,200
    
    
    
    86,209Property and equipment, net
    
    
    19,757
    
    
    
    15,469Test systems, net
    
    
    6,283
    
    
    
    5,349Intangible assets, net
    
    
    470
    
    
    
    472Deferred tax assets
    
    
    3,008
    
    
    
    1,815Total assets
    
    $
    313,718
    
    
    $
    109,314LIABILITIES, TEMPORARY EQUITY AND SHAREHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    13,187
    
    
    $
    13,960Customer deposits
    
    
    24,765
    
    
    
    23,103Deferred revenue
    
    
    24,254
    
    
    
    20,204Accrued expenses
    
    
    15,068
    
    
    
    12,667Accrued warranties
    
    
    6,456
    
    
    
    5,307Convertible preferred stock warrant liability
    
    
    
    
    
    
    3,522Total current liabilities
    
    
    83,730
    
    
    
    78,763Other non-current liabilities
    
    
    2,655
    
    
    
    2,005Total liabilities
    
    
    86,385
    
    
    
    80,768COMMITMENTS AND CONTINGENCIES (Note D)TEMPORARY EQUITYRedeemable convertible preferred stock, $1 par value, zero and 25,686,898 shares authorized;
zero and 25,221,239 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively,
liquidation amount: zero and $52,587 at September 30, 2007 and December 31, 2006, respectively
    
    
    
    
    
    
    212,663SHAREHOLDERS EQUITY (DEFICIT)Preferred stock, $1 par value, 10,000,000 and zero shares authorized at September 30, 2007 and December 31, 2006;
zero shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively
    
    
    
    
    
    
    Common stock, $.01 par value, 200,000,000 and 47,689,147 shares authorized at September 30, 2007 and December 31, 2006;
49,195,337 and 9,264,291 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively
    
    
    492
    
    
    
    93Additional paid-in capital
    
    
    645,110
    
    
    
    1,771Treasury stock, 1,632 shares at cost
    
    
    
    
    
    
    Accumulated other comprehensive loss
    
    
    (415
    )
    
    
    Accumulated deficit
    
    
    (417,854
    )
    
    
    (185,981
    )Total shareholders equity (deficit)
    
    
    227,333
    
    
    
    (184,117
    )TOTAL LIABILITIES, TEMPORARY EQUITY AND SHAREHOLDERS
EQUITY (DEFICIT)
    
    $
    313,718
    
    
    $
    109,314
  3




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    September 30, 2007
    
    
    September 30, 2006Revenue
    
    $
    59,221
    
    
    $
    37,173
    
    
    $
    154,099
    
    
    $
    96,504Cost of revenue
    
    
    37,151
    
    
    
    23,651
    
    
    
    95,694
    
    
    
    65,851Gross profit
    
    
    22,070
    
    
    
    13,522
    
    
    
    58,405
    
    
    
    30,653Operating expenses:Research and development
    
    
    9,624
    
    
    
    6,164
    
    
    
    24,471
    
    
    
    14,028Selling, general and administrative
    
    
    11,126
    
    
    
    5,905
    
    
    
    28,844
    
    
    
    14,878Total operating expenses
    
    
    20,750
    
    
    
    12,069
    
    
    
    53,315
    
    
    
    28,906Income from operations
    
    
    1,320
    
    
    
    1,453
    
    
    
    5,090
    
    
    
    1,747Other income (expense), net
    
    
    2,775
    
    
    
    (392
    )
    
    
    3,947
    
    
    
    (1,150
    )Income before income tax and cumulative effect of change in accounting principle
    
    
    4,095
    
    
    
    1,061
    
    
    
    9,037
    
    
    
    597Income tax expense (benefit)
    
    
    1,512
    
    
    
    (2,083
    )
    
    
    3,221
    
    
    
    (5,448
    )Income before cumulative effect of change in accounting principle
    
    
    2,583
    
    
    
    3,144
    
    
    
    5,816
    
    
    
    6,045Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,140
    )Net income
    
    
    2,583
    
    
    
    3,144
    
    
    
    5,816
    
    
    
    3,905Accretion of redeemable convertible preferred stock
    
    
    
    
    
    
    (22,760
    )
    
    
    (237,582
    )
    
    
    (54,563
    )Net income (loss) attributable to common shareholders
    
    $
    2,583
    
    
    $
    (19,616
    )
    
    $
    (231,766
    )
    
    $
    (50,658
    )Net income (loss) per share attributable to common shareholdersBasic
    
    $
    0.05
    
    
    $
    (2.21
    )
    
    $
    (7.46
    )
    
    $
    (5.76
    )Diluted
    
    $
    0.05
    
    
    $
    (2.21
    )
    
    $
    (7.46
    )
    
    $
    (5.76
    )Weighted average common shares outstanding used in computing net income (loss) per
share attributable to common shareholdersBasic
    
    
    49,130
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789Diluted
    
    
    54,405
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789
  4




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Cash flows from operating activities:Net income
    
    $
    5,816
    
    
    $
    3,905Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    4,563
    
    
    
    1,976Noncash charge for stock compensation
    
    
    2,519
    
    
    
    46Change in carrying value of convertible preferred stock warrants
    
    
    108
    
    
    
    3,203Loss on disposal of property and equipment
    
    
    21
    
    
    
    5Deferred income tax provision
    
    
    2,510
    
    
    
    (5,541
    )Deferred rent and obligation to landlord
    
    
    934
    
    
    
    7Changes in operating assets and liabilities:Accounts receivable
    
    
    (19,801
    )
    
    
    (539
    )Inventories
    
    
    (16,406
    )
    
    
    (9,186
    )Prepaid expenses and other current assets
    
    
    (1,038
    )
    
    
    (1,604
    )Accounts payable
    
    
    (773
    )
    
    
    3,839Customer deposits
    
    
    1,662
    
    
    
    (6,204
    )Deferred revenue
    
    
    4,050
    
    
    
    5,179Accrued expenses
    
    
    2,282
    
    
    
    2,517Accrued warranties
    
    
    1,149
    
    
    
    987Net cash used in operating activities
    
    
    (12,404
    )
    
    
    (1,410
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (7,087
    )
    
    
    (7,598
    )Cost of test systems
    
    
    (2,817
    )
    
    
    (2,673
    )Payments for intangible assets
    
    
    (40
    )
    
    
    (293
    )Net cash used in investing activities
    
    
    (9,944
    )
    
    
    (10,564
    )Cash flows from financing activities:Proceeds from notes payable
    
    
    
    
    
    
    900Payments on notes payable
    
    
    (25
    )
    
    
    (16
    )Proceeds from the issuance of preferred stock, net of issuance costs
    
    
    
    
    
    
    8Proceeds from initial public offering, net of issuance costs
    
    
    184,678
    
    
    
    Proceeds from exercise of warrants
    
    
    528
    
    
    
    Proceeds from exercise of stock options
    
    
    2,031
    
    
    
    57Net cash provided by financing activities
    
    
    187,212
    
    
    
    949Effect of exchange rate changes on cash
    
    
    (415
    )
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    164,449
    
    
    
    (11,025
    )Cash and cash equivalents at beginning of period
    
    
    20,137
    
    
    
    30,396Cash and cash equivalents at end of period
    
    $
    184,586
    
    
    $
    19,371
  5




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##### 



TOMOTHERAPY INCORPORATED AND SUBSIDIARIES
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE A  BASIS OF PRESENTATION
    NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Initial Public Offering
   Use of Estimates
  Principles of Consolidation
  6




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##### 



Cash and Cash Equivalents
   Fair Value of Financial Instruments
  Foreign Currency
  Inventories
   September 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    40,071
    
    
    $
    30,091Work-in-process
    
    
    6,276
    
    
    
    4,762Finished goods
    
    
    10,085
    
    
    
    5,173$
    56,432
    
    
    $
    40,026
 Property and Equipment
  7




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##### 



September 30,
    
    
    December 31,2007
    
    
    2006Furniture and equipment
    
    $
    7,832
    
    
    $
    5,166Computer equipment
    
    
    5,216
    
    
    
    3,706Computer software
    
    
    4,746
    
    
    
    1,522Leasehold improvements
    
    
    7,933
    
    
    
    6,744In process
    
    
    1,365
    
    
    
    3,20227,092
    
    
    
    20,340Less: Accumulated depreciation and amortization
    
    
    (7,335
    )
    
    
    (4,871
    )Property and equipment, net
    
    $
    19,757
    
    
    $
    15,469
  Furniture and equipment
    
    5 to 10 yearsComputer equipment and software
    
    3 to 7 yearsLeasehold improvements
    
    Lesser of useful life or the remaining lease term
  Test Systems
   September 30,
    
    
    December 31,2007
    
    
    2006Test systems at cost
    
    $
    8,325
    
    
    $
    7,210Less: Accumulated amortization
    
    
    (2,042
    )
    
    
    (1,861
    )Test systems, net
    
    $
    6,283
    
    
    $
    5,349
  Warranty Cost
  September 30,
    
    
    September 30,2007
    
    
    2006Balance, beginning of the period
    
    $
    5,307
    
    
    $
    2,923Charged to cost of revenue
    
    
    8,225
    
    
    
    6,257Adjustments related to change in estimate
    
    
    388
    
    
    
    525Actual product warranty expenditures
    
    
    (7,464
    )
    
    
    (5,795
    )Balance, end of period
    
    $
    6,456
    
    
    $
    3,910
 8




---



##### 



Stock Split
  Revenue Recognition
 Revenue
Recognition Revenue Arrangements with
Multiple Deliverables.
 
    
    Persuasive evidence of an arrangement exists.The Company requires evidence of a purchase
order with a customer specifying the terms and conditions of the product or services to be
delivered, typically in the form of a signed quotation or purchase order from the customer.
    
    Title and risk of loss have been transferred to the customer.During the installation
phase, each System is fully tested to confirm that it functions within operating
specifications. Upon completion of the test procedures, the customer signs the acceptance
test procedures document, or ATP, acknowledging acceptance of the system. Revenue for the
sale of systems is recognized upon receipt of the signed ATP.
    
    The sales price is fixed or determinable.All contract terms are fixed in the signed
quotation or purchase order received from the customer. The contracts do not contain rights
of cancellation, return, exchanges or refunds.
    
    Collection is reasonably assured.Due to the fact that the Companys sales are to
hospitals and cancer treatment centers with significant resources, the Company considers
accounts receivable to be fully collectible. In addition, the Companys contracts generally
require staged payments as follows: 10% to 30% down payment, 60% to 70% due upon shipment
and 10% to 20% due upon final acceptance by the customer.
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Product sales
    
    $
    52,455
    
    
    $
    33,638
    
    
    $
    137,025
    
    
    $
    88,835Service and other revenue
    
    
    6,766
    
    
    
    3,535
    
    
    
    17,074
    
    
    
    7,669Total revenue
    
    $
    59,221
    
    
    $
    37,173
    
    
    $
    154,099
    
    
    $
    96,504
 Stock-Based Compensation
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 9




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##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of revenue
    
    $
    195
    
    
    $
    
    
    
    $
    464
    
    
    $
    Research and development
    
    
    320
    
    
    
    
    
    
    
    964
    
    
    
    Selling, general and administrative
    
    
    393
    
    
    
    33
    
    
    
    1,282
    
    
    
    46Income tax benefit
    
    
    (111
    )
    
    
    
    
    
    
    (377
    )
    
    
    Net decrease in net income
    
    $
    797
    
    
    $
    33
    
    
    $
    2,333
    
    
    $
    46
  Net Income (Loss) Per Share of Common Stock
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic:Income before cumulative effect of change in accounting
principle
    
    $
    0.05
    
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.69Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.24
    )Net income
    
    $
    0.05
    
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.44Net income (loss) attributable to common shareholders
    
    $
    0.05
    
    
    $
    (2.21
    )
    
    $
    (7.46
    )
    
    $
    (5.76
    )Diluted:Income before cumulative effect of change in accounting
principle
    
    $
    0.05
    
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.69Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.24
    )Net income
    
    $
    0.05
    
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.44Net income (loss) attributable to common shareholders
    
    $
    0.05
    
    
    $
    (2.21
    )
    
    $
    (7.46
    )
    
    $
    (5.76
    )Weighted average common shares outstanding used in:Basic
    
    
    49,130
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789Diluted
    
    
    54,405
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789
   10




---



##### 



Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Preferred stock (as if converted)
    
    
    
    
    
    
    25,221
    
    
    
    
    
    
    
    25,221Contingent common shares
    
    
    
    
    
    
    1,289
    
    
    
    
    
    
    
    1,289Stock options and warrants
    
    
    34
    
    
    
    7,850
    
    
    
    94
    
    
    
    7,85034
    
    
    
    34,360
    
    
    
    94
    
    
    
    34,360
  11




---



##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006HistoricalNet income (loss) per share- basicNumerator:Net income (loss) attributable to common shareholders
    
    $
    2,583
    
    
    $
    (19,616
    )
    
    $
    (231,766
    )
    
    $
    (50,658
    )Denominator:Weighted-average shares of common stock outstanding
    
    
    49,130
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789Net income (loss) attributable to common shareholders per share 
basic
    
    $
    0.05
    
    
    $
    (2.21
    )
    
    $
    (7.46
    )
    
    $
    (5.76
    )Net income (loss) per share- dilutedNumerator:Net income (loss) attributable to common shareholders
    
    $
    2,583
    
    
    $
    (19,616
    )
    
    $
    (231,766
    )
    
    $
    (50,658
    )Denominator:Weighted-average shares of common stock outstanding
    
    
    54,405
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789Net income (loss) attributable to common shareholders per share 
diluted
    
    $
    0.05
    
    
    $
    (2.21
    )
    
    $
    (7.46
    )
    
    $
    (5.76
    )Pro forma (unaudited)Numerator:Net income (loss)
    
    $
    2,583
    
    
    $
    (19,616
    )
    
    $
    (231,766
    )
    
    $
    (50,658
    )Pro forma adjustment to add back preferred stock accretion
    
    
    
    
    
    
    22,760
    
    
    
    237,582
    
    
    
    54,563Pro forma net income
    
    $
    2,583
    
    
    $
    3,144
    
    
    $
    5,816
    
    
    $
    3,905Denominator for pro forma basic net income per share:Weighted-average shares of common stock outstanding
    
    
    49,130
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789Pro forma adjustments to reflect assumed conversion of preferred
stock (as if converted)
    
    
    
    
    
    
    25,221
    
    
    
    11,825
    
    
    
    25,221Pro forma adjustment to reflect assumed conversion of contingent
common shares (as if converted)
    
    
    
    
    
    
    1,289
    
    
    
    604
    
    
    
    1,289Shares used to compute pro forma basic net income per common
share
    
    
    49,130
    
    
    
    35,372
    
    
    
    43,487
    
    
    
    35,299Pro forma basic net income per share
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.13
    
    
    $
    0.11Denominator for pro forma diluted net income per share:Weighted-average shares of common stock outstanding
    
    
    54,405
    
    
    
    8,862
    
    
    
    31,058
    
    
    
    8,789Pro forma adjustments to reflect assumed conversion of preferred
stock (as if converted)
    
    
    
    
    
    
    25,221
    
    
    
    11,825
    
    
    
    25,221Pro forma adjustment to reflect assumed conversion of contingent
common shares (as if converted)
    
    
    
    
    
    
    1,289
    
    
    
    604
    
    
    
    1,289Pro forma adjustments to reflect assumed exercise of warrants and
stock options using treasury stock method
    
    
    
    
    
    
    5,471
    
    
    
    5,099
    
    
    
    5,472Shares used to compute pro forma diluted net income per share
    
    
    54,405
    
    
    
    40,843
    
    
    
    48,586
    
    
    
    40,771Pro forma diluted net income per share
    
    $
    0.05
    
    
    $
    0.08
    
    
    $
    0.12
    
    
    $
    0.10Pro forma outstanding anti-dilutive securities not included in
diluted earnings per share calculationStock options and warrants
    
    
    34
    
    
    
    
    
    
    
    94
    
    
    
    
 Segment Information
 Disclosures About Segments of an Enterprise and Related Information,
  12




---



##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006North America
    
    $
    31,505
    
    
    $
    24,681
    
    
    $
    79,550
    
    
    $
    54,085Europe
    
    
    12,090
    
    
    
    9,328
    
    
    
    45,432
    
    
    
    20,349Asia
    
    
    15,626
    
    
    
    3,164
    
    
    
    29,117
    
    
    
    22,070Total revenue
    
    $
    59,221
    
    
    $
    37,173
    
    
    $
    154,099
    
    
    $
    96,504
 Change in Accounting Principle
 Issuers Accounting under FASB
Statement No. 150
 Recent Accounting Pronouncements
 , Accounting for Uncertainty in Income
Taxes  an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements (SFAS. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities
 13




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##### 



NOTE C  INCOME TAXES
   Accounting for Uncertainty in
Income Taxes Accounting for Contingencies Accounting for Income Taxes
   NOTE D  COMMITMENTS AND CONTINGENCIES
   NOTE E  TEMPORARY EQUITY AND SHAREHOLDERS EQUITY (DEFICIT)
 Redeemable Convertible Preferred Stock
  14




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##### 



Valuation of Privately-Held-Company Equity Securities Issued
as Compensation.
 Warrants
    Contingent Common Shares
 Application of Issue No 98-5 to Certain Convertible
Instruments.
 Employee Stock Purchase Plan
  15




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##### 



NOTE F  STOCK OPTIONS
   Options OutstandingWeightedAverage
    
    
    AggregateShares
    
    
    
    
    
    
    Weighted
    
    
    Remaining
    
    
    instrinsicAvailable
    
    
    Number of
    
    
    Average Exercise
    
    
    Contractual
    
    
    value as of(In thousands, except per share amounts)
    
    for Grant
    
    
    Shares
    
    
    Price
    
    
    Term (in years)
    
    
    Sept. 30, 2007Balance at December 31, 2006
    
    
    2,293
    
    
    
    9,156
    
    
    $
    3.30Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (97
    )
    
    
    97
    
    
    
    21.93Cancelled or expired
    
    
    87
    
    
    
    (87
    )
    
    
    5.93Exercised
    
    
    
    
    
    
    (2,360
    )
    
    
    0.86Balance at September 30, 2007
    
    
    2,283
    
    
    
    6,806
    
    
    
    4.38
    
    
    
    5.74
    
    
    $
    128,303Exercisable at September 30, 2007
    
    
    
    
    
    
    1,910
    
    
    
    2.51
    
    
    
    6.25
    
    
    $
    39,562
    16




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##### 



Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Employee Stock Option PlansExpected term (in years)
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25
    
    
    
    4.25Risk-free interest rate
    
    
    4.6
    %
    
    
    5.1
    %
    
    
    4.6
    %
    
    
    3.8%-5.1
    %Expected volatility
    
    
    45
    %
    
    
    65
    %
    
    
    45% - 65
    %
    
    
    65
    %Expected dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value at grant date
    
    $
    27.17
    
    
    $
    7.27
    
    
    $
    21.93
    
    
    $
    7.18
 NOTE G  RELATED PARTY TRANSACTIONS
  NOTE H
 SUBSEQUENT EVENTS
 Follow-on Public Offering
  17




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition as of September 30, 2007 and
results of operations for the three and nine months ended September 30, 2007 and 2006 should be
read together with our financial statements and related notes included elsewhere in this report.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not limited to those set
forth under Risk Factors and elsewhere in this report. We urge you not to place undue reliance on
these forward-looking statements, which speak only as of the date of this report. All
forward-looking statements included in this report are based on information available to us on the
date of this report, and we assume no obligation to update any forward-looking statements contained
in this report.
  Forward-looking Statements
  Overview
   Financial Operations
 Revenue
  18




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##### 




    
    there is persuasive evidence that an arrangement exists;
    
    the title and risk of loss have been transferred to the customer, as evidenced by the
customers signature on our acceptance test procedure document;
    
    the sales price is fixed or determinable; and
    
    collection is reasonably assured.
   Customer concentration.
 Geographic breakdown.
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006North America
    
    
    53
    %
    
    
    66
    %
    
    
    52
    %
    
    
    56
    %Europe
    
    
    21
    %
    
    
    25
    %
    
    
    29
    %
    
    
    21
    %Asia
    
    
    26
    %
    
    
    9
    %
    
    
    19
    %
    
    
    23
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Distributor sales.
 Sales agents.
 Backlog
  19




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##### 



Cost of revenue
    Research and development expenses
   Selling, general and administrative expenses
   Other income (expense), net
  Key Factors Affecting our Performance
  Extended sales cycle and fluctuations.
 20




---



##### 



Customer mix and gross margins.
 
    
    Sales outside of the North America accounted for approximately 48% and 44% of our revenue
for the nine months ended September 30, 2007 and 2006, respectively. Increased sales of the
Hi Art system outside of the United States have tended to impact our gross margins favorably
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.
    
    The majority of our sales to date have been to university research centers, hospitals and
cancer treatment centers that are early adopters of new technologies and that tend to
replace equipment regularly in order to upgrade their treatment capabilities. Our sales
strategy includes increasing sales to community hospitals and smaller treatment centers,
which have traditionally been slower in their adoption of new technologies primarily due to
cost-based purchasing decisions. Our efforts to penetrate this market may require us to
lower the price of the Hi Art system. Similarly, we may be required to lower the price of
the Hi Art system in order to sell to national chains or large volume purchasers.
    
    Our ability to demonstrate the clinical benefits of the Hi Art system compared to
competing systems is likely to be a factor in our ability to maintain the selling price of
the Hi Art system. We may need to demonstrate increased clinical benefits and offer
additional features in order to compete favorably with our competitors in the medium to long
term.
 Component supply and cost.
 Operating expenses.
 21




---



##### 



Results of Operations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    62.7
    %
    
    
    63.6
    %
    
    
    62.1
    %
    
    
    68.2
    %Gross profit
    
    
    37.3
    %
    
    
    36.4
    %
    
    
    37.9
    %
    
    
    31.8
    %Operating expenses:Research and development
    
    
    16.3
    %
    
    
    16.6
    %
    
    
    15.9
    %
    
    
    14.5
    %Selling, general and administrative
    
    
    18.8
    %
    
    
    15.9
    %
    
    
    18.7
    %
    
    
    15.4
    %Total operating expenses
    
    
    35.1
    %
    
    
    32.5
    %
    
    
    34.6
    %
    
    
    29.9
    %Income from operations
    
    
    2.2
    %
    
    
    3.9
    %
    
    
    3.3
    %
    
    
    1.9
    %Other income (expense), net
    
    
    4.7
    %
    
    
    -1.0
    %
    
    
    2.6
    %
    
    
    -1.2
    %Income before income tax
    
    
    6.9
    %
    
    
    2.9
    %
    
    
    5.9
    %
    
    
    0.7
    %Income tax expense (benefit)
    
    
    2.5
    %
    
    
    -5.6
    %
    
    
    2.1
    %
    
    
    -5.6
    %Income before cumulative effect of change in accounting
principle and accretion of redeemable convertible
preferred stock
    
    
    4.4
    %
    
    
    8.5
    %
    
    
    3.8
    %
    
    
    6.3
    %
 Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006
 Revenue
   Cost of revenue
  Research and development expenses
  22




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##### 



Selling, general and administrative expenses
  Stock-based compensation
  Other income (expense), net
  Income tax expense (benefit)
  Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
 Revenue
   23




---



##### 



Cost of revenue
  Research and development expenses
  Selling, general and administrative expenses
  Stock-based compensation
  Other income (expense), net
  24




---



##### 



Income tax expense (benefit)
  Liquidity and Capital Resources
  Cash Flows
 Cash flows from operating activities.
  Cash flows from investing activities.
  Cash flows from financing activities.
 25




---



##### 



Loans and Available Borrowings
  Contractual Obligations and Commitments
  Payment Due by PeriodLess Than
    
    1-3
    
    3-5
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsOperating lease obligations
    
    $
    19,188
    
    
    $
    1,962
    
    
    $
    4,101
    
    
    $
    4,180
    
    
    $
    8,945Notes payable
    
    
    875
    
    
    
    34
    
    
    
    247
    
    
    
    467
    
    
    
    127Total
    
    $
    20,063
    
    
    $
    1,996
    
    
    $
    4,348
    
    
    $
    4,647
    
    
    $
    9,072
  Operating Capital and Capital Expenditure Requirements
  
    
    revenue generated by sales of the Hi Art system and service plans;
    
    costs associated with our sales and marketing initiatives and manufacturing activities;
    
    the level of investment needed in our service and support infrastructure;
    
    costs of our research and development activities; and
    
    effects of competing technological and market developments.
  Off-Balance Sheet Arrangements
  26




---



##### 



Critical Accounting Policies and Estimates
   Recent Accounting Pronouncements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements.
 , Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurements (SFAS No. 157)
 The Fair Value Option for Financial Assets and
Financial Liabilities
 27




---



##### 



Accounting
for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Risk
   Foreign Currency Exchange Rate Risk
  Item 4. Controls and Procedures
     28




---



##### 



Part II. OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Risks Related to Our Business
 We depend on sales of the Hi Art system for substantially all of our revenue and if we are unable
to grow or sustain sales of the Hi Art system, we may not generate sufficient revenue to support
our business.
  The long sales cycle and high unit price of the Hi Art system, as well as other factors, may
contribute to substantial fluctuations in our quarterly operating results and stock price and make
it difficult to compare our results of operations to prior periods.
  We face competition from numerous competitors, many of whom have greater resources than we do,
which may make it more difficult for us to achieve significant market penetration.
  29




---



##### 



Our reliance on single-source suppliers for critical components of the Hi Art system could harm our
ability to meet demand for our products in a timely and cost effective manner.
   Sales of the Hi Art system may be adversely affected if clinicians do not widely adopt IGRT and
adaptive radiotherapy, which is an emerging cancer treatment technique.
  30




---



##### 



We may be delayed or prevented from implementing our long-term sales strategy if we fail to educate
clinicians and patients about the benefits of the Hi Art system and to implement enhancements to
the system in a timely manner.
   Our ability to increase our profitability depends in part on maintaining our average selling prices
and increasing our gross margins, which we may not be able to achieve.
   31




---



##### 



If we are unable to maintain existing research collaboration relationships, enter into new
collaboration arrangements in the future or enter into license agreements with our collaborators
and others, our ability to enhance the Hi Art system may be adversely affected.
    We rely on a third party to perform spare parts shipping and other logistics functions on our
behalf. A failure or disruption at our logistics providers would adversely impact our business.
  If third-party payors do not continue to provide sufficient coverage and reimbursement to
healthcare providers for use of the Hi Art system, sales of the Hi Art system may be adversely
affected.
    32




---



##### 



We have a limited history of manufacturing the Hi Art system in commercial quantities and may
encounter manufacturing problems or delays that could result in lost revenue.
  Our manufacturing operations are conducted at a single location and any disruption at our facility
could increase our expenses.
  We rely on local distributors to market and distribute the Hi Art system in much of the Asian
market.
  33




---



##### 



Our results may be adversely affected by changes in foreign currency exchange rates.
   Technological breakthroughs in cancer treatment could render the Hi Art system obsolete.
  A significant percentage of our sales are in international markets, and economic, political and
other risks associated with international sales and operations could adversely affect our sales or
make them less predictable.
      34




---



##### 



Product liability suits, whether or not meritorious, could be brought against us due to an alleged
defective component of the Hi Art system or for the misuse of the Hi Art system. These suits could
result in expensive and time-consuming litigation, payment of substantial damages and an increase
in our insurance rates.
  The effectiveness of procedures performed using the Hi Art system are not yet supported by
long-term clinical data and the medical community has not yet developed a large body of
peer-reviewed literature that supports the Hi Art systems safety and efficacy.
  Our success will depend on our ability to attract and retain qualified personnel.
  35




---



##### 



If we do not effectively manage our growth, our business may be significantly harmed.
  Many countries require that software user interfaces be translated into their respective local
language. Failure to adhere to each countrys law with respect to the language of the user
interface may cause substantial disruptions in the delivery of new systems and the use of existing
systems.
  We may need to raise additional capital in the future and may be unable to do so on acceptable
terms. This could limit our ability to grow and carry out our business plan.
  36




---



##### 



We have not yet evaluated our internal controls over financial reporting in compliance with
Section 404 of the Sarbanes-Oxley Act.
  Risks Related to Our Intellectual Property
 If we are not able to meet the requirements of our license agreement with the Wisconsin Alumni
Research Foundation, or WARF, we could lose access to the technologies licensed thereunder and be
unable to produce or sell the Hi Art system.
  If we are not able to adequately protect our intellectual property and proprietary technology our
competitive position, future business prospects and financial performance will be adversely
affected.
         37




---



##### 



Our failure to protect the intellectual property we create would cause our business to suffer.
  We may initiate lawsuits to protect or enforce our patents or other intellectual property rights,
which could be expensive and, if we lose, could cause us to lose some of our intellectual property
rights.
   We may become subject to costly intellectual property litigation, which could affect our future
business and financial performance.
  We may be subject to claims that our employees have wrongfully used or disclosed alleged trade
secrets of their former employers.
  38




---



##### 



Risks Related to Regulatory Matters
 Modifications, upgrades and future products related to the Hi Art system or new indications may
require new FDA premarket approvals or 510(k) clearances, and such modifications, or any defects in
design or manufacture, may require us to recall or cease marketing the Hi Art system until
approvals or clearances are obtained.
    The Hi Art system is subject to recalls even after receiving FDA clearance or approval, which would
harm our reputation, business and financial results.
  If we or our distributors do not obtain and maintain the necessary regulatory approvals in a
specific country, we will not be able to market and sell the Hi Art system in that country.
  39




---



##### 



We must manufacture the Hi Art system in accordance with federal and state regulations and we could
be forced to recall our installed systems or terminate production if we fail to comply with these
regulations.
  If we are found to have violated laws protecting the confidentiality of patient health information,
we could be subject to civil or criminal penalties, which could increase our liabilities and harm
our reputation or our business.
   We are subject to federal and state laws prohibiting kickbacks and false or fraudulent claims,
which, if violated, could subject us to substantial penalties. Additionally, any challenge to or
investigation into our practices under these laws could cause adverse publicity and be costly to
respond to, and thus could harm our business.
   40




---



##### 



Risks Related to Our Common Stock
 Our common stock has only recently been publicly traded and the price may fluctuate substantially.
          Sales of a substantial number of shares of our common stock in the market by our existing
shareholders, or the perception that such sales could occur, could result in a decline in our stock
price.
  41




---



##### 



Number of Shares/Percentage of TotalOutstanding
    
    Date of Availability for Resale into the Public Market2.1 million/4.3%
    
    November 17, 200724.1 million/48.6%
    
    January 8, 20080.8 million/1.6%
    
    Later than January 8, 2008
  A subset of our shareholders owns 20.7% of our outstanding common stock and could limit other
shareholders influence on corporate decisions or could delay or prevent a change in corporate
control.
  
    
    delaying, deferring or preventing a change in control of our company;
    
    entrenching our management and/or board;
    
    impeding a merger, consolidation, takeover or other business combination involving our
company; or
    
    discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain
control of our company.
  We do not anticipate paying cash dividends on our common stock in the future.
  Anti-takeover provisions included in our amended and restated articles of incorporation and bylaws
could delay or prevent a change of control of our company, which could adversely impact the value
of our common stock and may prevent or frustrate attempts by our shareholders to replace or remove
our current management.
      42




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Sales of Unregistered Securities
     (b) Use of Proceeds from Public Offering of Common Stock
    43




---



##### 



(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Item 3. Defaults Upon Senior Securities
  Item 4. Submission of Matters to a Vote of Security Holders
  Item 5. Other Information
  Item 6. Exhibits
 Exhibit Number
    
    Description10.1
    
    Amendment and Waiver Agreement, dated as of September 13, 2007, to Amended and Restated Investment
Agreement, dated February 8, 2007, by and among the Registrant and the other parties hereto. (1)10.2
    
    Form of Underwriting Agreement (1)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (2)32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (2)
 
 (1)
    
    Filed as an exhibit to Registrants Registration Statement on Form S-1 (Reg. No. 333-146219)
on September 21, 2007.(2)
    
    Filed as an exhibit to this Form 10-Q. 44




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##### 



SIGNATURES
   TOMOTHERAPY, INC./s/ Frederick A. RobertsonFrederick A. RobertsonChief Executive OfficerTOMOTHERAPY, INC./s/ Stephen C. HathawayStephen C. HathawayChief Financial Officer and Treasurer 45