PROCEPT BioRobotics Corp

1. Organization

Description of Business

PROCEPT BioRobotics Corporation, or the Company, is a surgical robotics company focused on advancing patient care by developing transformative solutions in urology. It develops, manufactures and sells robotic systems, including the AquaBeam Robotic System and HYDROS Robotic System, which are advanced, image-guided, surgical robotic systems for use in minimally invasive urologic surgery, with an initial focus on treating benign prostatic hyperplasia, or BPH. BPH is the most common prostate disease and impacts approximately 40 million men in the United States. The Company’s robotic systems employ a single-use disposable handpiece to deliver the Company’s proprietary Aquablation therapy, which combines real-time, multi-dimensional imaging, personalized treatment planning, automated robotics and heat-free waterjet ablation for targeted and rapid removal of prostate tissue. The Company received U.S. Food and Drug Administration, or FDA, clearance in December 2017 to market its first generation robot system, the AquaBeam Robotic System, pursuant to a de novo classification. On August 30, 2023, the Company received 510(k) clearance from the FDA to remove the contraindication from its labeling that restricted Aquablation therapy from treating BPH in patients that also have an active diagnosis of prostate cancer. On August 20, 2024, the Company received 510(k) clearance from the FDA for its next generation robot system, HYDROS Robotic System.

2. Summary of Significant Accounting Policies

Basis of Preparation

The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and pursuant to the rules and regulations of the United States Securities and Exchange Commission or SEC. These condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

Unaudited Interim Financial Statements

The accompanying balance sheet as of September 30, 2024, the statements of operations and comprehensive loss and cash flows for the three and nine months ended September 30, 2024 and 2023, and the statements of stockholders’ equity as of September 30, 2024 and 2023, are unaudited. The financial data and other information disclosed in these notes to the financial statements related to September 30, 2024, and the three and nine months ended September 30, 2024 and 2023, are also unaudited. The accompanying balance sheet as of December 31, 2023 has been derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission.

The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to a fair statement of the Company’s financial position as of September 30, 2024, and the results of its operations and cash flows for the three and nine months ended September 30, 2024 and 2023. The results for the three and nine months ended September 30, 2024, are not necessarily indicative of results to be expected for the year ending December 31, 2024, or for any other interim period or for any future year and should be read in conjunction with the annual consolidated financial statements included in the Company’s Annual Report.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the condensed consolidated financial statements. Management uses significant judgment when making estimates related to its valuation of inventory and accounts receivable, stock-based compensation expense, right-of-use lease asset, lease liability, valuations of loan facility derivative liability, as well as certain accrued liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

Accounting Policies Update

Given the release of the next generation robotic system, HYDROS Robotic System, for a limited period and on a case by case basis, the Company may enter into arrangements with existing customers to sell a HYDROS Robotic System with an exchange of a previously purchased AquaBeam Robotic System for additional consideration. The Company accounts for these transactions under ASC 606 - Revenue from Contracts with Customers. For the three and nine months ended September 30, 2024, such transactions were not material.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board or FASB, issued Accounting Standards Update, or ASU, 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, that requires disclosure of significant segment expenses that are regularly reviewed by the chief operating decision maker and included within each reported measure of segment profit or loss. The standard also requires disclosure of the composition of other segment items included in the measure of segment profit or loss that are not separately disclosed. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company plans to adopt the ASU and related updates on January 1, 2025. The Company is evaluating the impact this ASU will have on its financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for all public entities for fiscal years beginning after December 15, 2024. Early adoption is permitted and should be applied either prospectively or retrospectively. The Company plans to adopt the ASU and related updates on January 1, 2025. The Company is evaluating the impact of this ASU will have on its financial statement disclosures.

3. Fair Value Measurements

The following is a summary of assets and liabilities measured at fair value on a recurring basis (in thousands):

Cash equivalents consist primarily of money market deposit funds and U.S. treasury bills.

There were no transfers in and out of Level 3 during the nine months ended September 30, 2024 and year ended December 31, 2023.

The following table sets forth a summary of the changes in the estimated fair value of the Company’s loan facility derivative liability, classified as Level 3 (in thousands):

4. Inventory

Inventory consists of the following (in thousands):

The Company reclassified $4.9 million associated with sub-assemblies from raw materials to work-in process in the December 31, 2023 balances to conform with current year presentation.

5. Property and Equipment, Net

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

6. Long-Term Debt

In October 2022, the Company entered into a loan and security agreement (“the Loan Agreement”) with Canadian Imperial Bank of Commerce, or CIBC. The Agreement provides for a senior secured term loan facility in the aggregate principal amount of $52.0 million (the "Term Loan Facility") which was borrowed in full.

The Term Loan Facility is scheduled to mature on the fifth anniversary of the closing date (the “Maturity Date”). The Agreement provides for interest-only payments on the Term Loan Facility for the first thirty-six months following the Maturity Date (the “Initial Interest-Only Period”). The Initial Interest-Only Period will be extended to an additional twelve months if the Company achieves either (i) $200.0 million or greater in revenue in any twelve-month period or (ii) $0 or greater in EBITDA (as defined in the Loan Agreement) in any six-month period. Thereafter, amortization payments on the Term Loan Facility will be payable monthly until the Maturity Date in monthly installments equal to 20% of the then outstanding principal amount of the Term Loan Facility divided by 12 plus any accrued and unpaid interest. The Company has the option to prepay the Term Loan Facility without any prepayment charge or fee.

The loan borrowed under the Term Loan Facility bears interest at an annual rate equal to the secured overnight financing rate or SOFR (calculated based on an adjustment of.10%,.15% and.25%, respectively, for one-month, three-month or six-month term SOFR as of a specified date, subject to a floor of 1.5%) plus an applicable margin of 2.25%.

The obligations under the Loan Agreement are secured by substantially all of the Company's assets, including its intellectual property and by a pledge all of the Company's equity interests in its U.S. subsidiaries and 65% of the Company's equity interests in its non-U.S. subsidiaries that are directly owned by the Company. The Company is obligated to maintain in deposit accounts held at the lender the lesser of (i) $90.0 million or (ii) all of its non-operating cash and allow the Company to maintain cash or cash equivalents in excess of that amount with other financial institutions.

7. Stock-Based Compensation

Total stock-based compensation recognized, before taxes, are as follows (in thousands):

Stock Options

The Company had 6.8 million shares available for grant as of September 30, 2024 under the 2021 Equity Incentive Award Plan or the 2021 Plan.

A summary of the Company’s stock option activity and related information are as follows (options in thousands):

As of September 30, 2024 and December 31, 2023, the aggregate pre-tax intrinsic value of options outstanding and exercisable was $271.4 million and $144.0 million, respectively, and the aggregate pre-tax intrinsic value of options outstanding were $300.4 million and $169.5 million, respectively. The aggregate pre-tax intrinsic value of options exercised was $47.2 million and $8.9 million during the nine months ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, there was a total of $9.9 million of unrecognized stock-based compensation expense related to stock options.

The fair value of the options granted to employees or directors was estimated as of the grant date using the Black-Scholes model assuming the weighted-average assumptions listed in the following table:

Restricted Stock Units

A summary of the Company’s restricted stock unit, or RSU, activity and related information are as follows (RSUs in thousands):

As of September 30, 2024, there was a total of $70.3 million of unrecognized stock-based compensation expense related to RSUs.

Performance Stock Units

The 2021 Plan provides for issuance of performance stock units or PSUs. PSUs granted are contingent upon the achievement of predetermined market, performance, and service conditions. PSUs are awarded to executives of the Company and generally time vest overtwo andthree years. Vesting is also generally contingent upon achievement of applicable performance metrics. PSU expense is recognized over the requisite service period.

During the nine months ended September 30, 2024, the Company awarded approximately 61,000 PSU shares with both a performance and service condition. A certain performance condition will be defined at a later date. Per ASC 718 – Compensation, Stock Compensation, these grants have not met the definition of having a grant date, and therefore, no expense has been recognized for these PSUs. Expense will be recognized when the performance condition becomes defined.

During the nine months ended September 30, 2024, the Company awarded approximately 20,000 PSU shares with both a market and service condition.

No PSU shares were forfeited or released during the three and nine months ended September 30, 2024. As of September 30, 2024, unrecognized compensation expense related to PSUs was not material.

Employee Stock Purchase Plan

As of September 30, 2024, there was approximately $1.2 million of unrecognized cost related to the Employee Stock Purchase Plan or ESPP. This cost is expected to be recognized over a weighted average period of 0.6 years. As of September 30, 2024, a total of 1.5 million shares were available for issuance under the ESPP.

The fair value of the options granted to employees was estimated as of the grant date using the Black-Scholes model assuming the weighted-average assumptions listed in the following table:

8. Net Loss Per Share

Net loss per share was determined as follows (in thousands, except per share amounts):

The following potentially dilutive securities outstanding have been excluded from the computations of weighted-average shares outstanding because such securities have an antidilutive impact due to losses reported (in common stock equivalent shares, in thousands):

9. Revenue

The following table presents revenue disaggregated by type and geography (in thousands):

10. Segment, Geographical, and Customer Concentration

The Company operates as a single operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, reviews financial information on an aggregate basis for the purposes of allocating resources and evaluating financial performance. The Company’s assets are primarily based in the United States.

No customers accounted for more than 10% of revenue during the three and nine months ended September 30, 2024 and 2023.

No customer accounted for more than 10% of accounts receivable at September 30, 2024 and December 31, 2023.

The following table presents revenue by significant geographical locations for the periods indicated:

11. Commitments and Contingencies

Guarantees and Indemnifications

In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any material claims or been required to defend any action related to its indemnification obligations. As of September 30, 2024 and December 31, 2023, the Company does not have any material indemnification claims that were probable or reasonably possible and consequently has not recorded related liabilities.

Facility Lease

In December 2021, the Company entered into a lease fortwo existing buildings, comprising approximately 158,221 square feet of space, located in San Jose, California. The lease commenced in July 2022, and will continue for 122 months following thereafter, withtwo five year options to extend the term of the lease.

Rent expense recognized under the lease, including additional rent charges for utilities, parking, maintenance, and real estate taxes, was $2.0 million and $2.6 million for the three months ended September 30, 2024 and 2023, and was $5.4 million and $6.6 million for the nine months ended September 30, 2024 and 2023.

Future minimum annual operating lease and debt repayments are as follows (in thousands):

,

As of September 30, 2024 and December 31, 2023, the Company’s security deposit is in the form of, and recorded as, restricted cash.

12. Defined Contribution Plan

The Company has a defined contribution retirement savings plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to defer a portion of their annual compensation on a pre-tax basis. Employer contributions were $0.5 million and $0.4 million for the three months ended September 30, 2024 and 2023, and $1.8 million and $1.2 million for the nine months ended September 30, 2024 and 2023.