SEC Filing | PROCEPT BioRobotics Corp

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prct-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			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 001-40797

PROCEPT BioRobotics Corporation

(Exact name of registrant as specified in its charter)


Delaware			26-0199180
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

900 Island Drive	Redwood City	CA	94065
(Address of Principal Executive Offices)			(Zip Code)

(650) 232-7200

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.00001 par value per share	PRCT	Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The registrant had outstanding 44,720,047 shares of common stock as of October 31, 2022.

PROCEPT BioRobotics Corporation

Form 10-Q – QUARTERLY REPORT

For the Quarter Ended September 30, 2022

TABLE OF CONTENTS


		Page
Part I. Financial Information
Item 1.	Condensed Consolidated Financial Statements (unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss	5
	Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	32
Item 4.	Controls and Procedures	33

Part II. Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
	Signatures

__________________

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “can”, “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. All statements other than statements of historical facts contained in this Quarterly Report, including without limitation statements regarding our business model and strategic plans for our products, technologies and business, including our implementation thereof, the impact on our business, financial condition and results of operations from the ongoing and global COVID-19 pandemic, or any other pandemic, epidemic or outbreak of an infectious disease in the United States or worldwide, the timing of and our ability to obtain and maintain regulatory approvals, our commercialization, marketing and manufacturing capabilities and strategy, our expectations about the commercial success and market acceptance of our products, the sufficiency of our cash, cash equivalents and short-term investments, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements.

The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties, and assumptions, including those described under the sections in this Quarterly Report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon these forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. We intend the forward-looking statements contained in this Quarterly Report to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

PROCEPT BioRobotics Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)


	September 30,		December 31,
	2022		2021

Assets
Current assets:
Cash and cash equivalents	$	249,217	$	304,320
Accounts receivable, net	12,838		4,464
Inventory	22,358		13,147
Prepaid expenses and other current assets	4,519		4,242
Total current assets	288,932		326,173
Restricted cash	3,814		777
Property and equipment, net	5,120		5,045
Operating lease right-of-use assets, net	24,424		3,279
Intangible assets, net	1,545		1,750
Other assets	202		—

Total assets	$	324,037	$	337,024
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	6,331	$	2,029
Accrued compensation	10,284		6,475
Deferred revenue	2,342		1,025

Operating lease – current portion	2,473		2,105

Other current liabilities	5,929		4,608
Total current liabilities	27,359		16,242
Note payable – non-current portion	50,692		50,004
Operating lease – non-current portion	23,415		1,991
Loan facility derivative liability	1,609		1,496

Other non-current liabilities	200		200
Total liabilities	103,275		69,933
Commitments and contingencies (see Note 11)




Stockholders’ equity:
Preferred stock, $0.00001 par value;
Authorized shares: 10,000 at September 30, 2022 and December 31, 2021
Issued and outstanding shares: none at September 30, 2022 and December 31, 2021	—		—
Common stock, $0.00001 par value;
Authorized shares: 300,000 at September 30, 2022 and December 31, 2021
Issued and outstanding shares: 44,714 and 43,676 at September 30, 2022 and December 31, 2021, respectively	—		—
Additional paid-in capital	541,048		528,666
Accumulated other comprehensive loss	217		(54)
Accumulated deficit	(320,503)		(261,521)
Total stockholders’ equity	220,762		267,091
Total liabilities and stockholders’ equity	$	324,037	$	337,024

The accompanying notes are an integral part of these condensed consolidated financial statements.

PROCEPT BioRobotics Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Revenue	$	20,349	$	8,668	$	51,237	$	24,335
Cost of sales	10,118		4,428		24,828		12,986
Gross profit	10,231		4,240		26,409		11,349
Operating expenses:
Research and development	7,582		4,919		19,299		13,917
Selling, general and administrative	24,754		12,118		62,794		34,765
Total operating expenses	32,336		17,037		82,093		48,682
Loss from operations	(22,105)		(12,797)		(55,684)		(37,333)
Interest expense	(1,455)		(1,469)		(4,317)		(4,370)
Interest and other income, net	947		163		1,019		198
Net loss	$	(22,613)	$	(14,103)	$	(58,982)	$	(41,505)
Net loss per share, basic and diluted	$	(0.51)	$	(1.22)	$	(1.33)	$	(5.64)
Weighted-average common shares used to
compute net loss per share attributable to
common shareholders, basic and diluted	44,640		11,580		44,276		7,361
Other comprehensive loss:
Unrealized gain (loss) on cash equivalents	185		(2)		271		(27)
Comprehensive loss	$	(22,428)	$	(14,105)	$	(58,711)	$	(41,532)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PROCEPT BioRobotics Corporation

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance at December 31, 2021	—	$	—	43,676	$	—	$	528,666	$	(54)	$	(261,521)	$	267,091
Issuance upon exercise of options	—	—		401	—		1,291		—		—		1,291
Stock-based compensation expense	—	—		—	—		1,552		—		—		1,552
Unrealized gain on cash equivalents	—	—		—	—		—		1		—		1
Net loss	—	—		—	—		—		—		(17,185)		(17,185)




Balance at March 31, 2022	—	—		44,077	—		531,509		(53)		(278,706)		252,750
Issuance upon exercise of options	—	—		400	—		1,572		—		—		1,572
Shares issued under employee stock purchase plan	—	—		61	—		1,289		—		—		1,289
Stock-based compensation expense	—	—		—	—		2,676		—		—		2,676
Unrealized gain on cash equivalents	—	—		—	—		—		85		—		85
Net loss	—	—		—	—		—		—		(19,184)		(19,184)
Balance at June 30, 2022	—	—		44,538	—		537,046		32		(297,890)		239,188
Issuance upon exercise of options	—	—		176	—		777		—		—		777
Stock-based compensation expense	—	—		—	—		3,225		—		—		3,225
Unrealized gain on cash equivalents	—	—		—	—		—		185		—		185
Net loss	—	—		—	—		—		—		(22,613)		(22,613)
Balance at September 30, 2022	—	$	—	44,714	—		$	541,048	$	217	$	(320,503)	$	220,762

The accompanying notes are an integral part of these condensed consolidated financial statements.

PROCEPT BioRobotics Corporation

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands)

(unaudited)


	Redeemable Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	25,402	$	243,854	4,713	$	—	$	18,788	$	(14)	$	(201,668)	$	(182,894)
Issuance upon exercise of options	—	—		504	—		1,225		—		—		1,225
Stock-based compensation expense	—	—		—	—		650		—		—		650
Unrealized loss on cash equivalents	—	—		—	—		—		(16)		—		(16)
Net loss	—	—		—	—		—		—		(12,822)		(12,822)




Balance at March 31, 2021	25,402	243,854		5,217	—		20,663		(30)		(214,490)		(193,857)
Issuance of preferred stock, net of issuance costs	4,448	84,710		—	—		—		—		—		—
Issuance upon exercise of options	—	—		575	—		1,415		—		—		1,415
Stock-based compensation expense	—	—		—	—		725		—		—		725
Unrealized loss on cash equivalents	—	—		—	—		—		(9)		—		(9)
Net loss	—	—		—	—		—		—		(14,580)		(14,580)
Balance at June 30, 2021	29,850	328,564		5,792	—		22,803		(39)		(229,070)		(206,306)
Issuance upon exercise of warrants	62	970		—	—		—		—		—		—
Issuance of preferred stock, net of issuance costs	—	—		—	—		—		—		—		—
Conversion of redeemable convertible preferred stock to common stock upon initial public offering	(29,912)	(329,534)		29,912	—		329,534		—		—		329,534
Issuance common stock upon initial public offering, net of issuance costs	—	—		7,539	—		172,409		—		—		172,409
Issuance upon exercise of options	—	—		229	—		855		—		—		855
Stock-based compensation expense	—	—		—	—		925		—		—		925
Unrealized loss on cash equivalents	—	—		—	—		—		(2)		—		(2)
Net loss	—	—		—	—		—		—		(14,103)		(14,103)
Balance at September 30, 2021	—	$	—	43,472	$	—	$	526,526	$	(41)	$	(243,173)	$	283,312

The accompanying notes are an integral part of these condensed consolidated financial statements.

PROCEPT BioRobotics Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2022		2021

Cash flows from operating activities:
Net loss	$	(58,982)	$	(41,505)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization	2,178		2,561
Stock-based compensation expense	7,452		2,300
Change in fair value of redeemable convertible preferred stock warrants and derivative liability	113		(235)
Non-cash lease adjustment	645		(249)
Inventory write-down	87		537



Changes in operating assets and liabilities:
Accounts receivable, net	(8,375)		(4,804)
Inventory	(9,502)		(3,580)
Prepaid expenses and other current assets	(2)		(606)
Other assets	(202)		—
Accounts payable	4,243		2,362
Accrued compensation	3,810		235
Accrued interest expense	688		804
Deferred revenue	1,318		615

Other liabilities	1,321		707
Net cash used in operating activities	(55,208)		(40,858)
Cash flows from investing activities:



Purchases of property and equipment	(1,787)		(260)
Net cash used in investing activities	(1,787)		(260)
Cash flows from financing activities:
Proceeds from issuance of Series G preferred stock, net of issuance costs	—		84,710
Proceeds from issuance of common stock under employee stock purchase plan	1,289		—
Proceeds from issuance of common stock from the exercise of stock options	3,641		3,495
Proceeds from the exercise of redeemable convertible preferred stock warrants	—		858
Proceeds from issuance of common stock from the initial public offering, net of underwriting discounts, commissions and offering expenses	—		172,409





Net cash provided by financing activities	4,930		261,472
Net (decrease) increase in cash, cash equivalents and restricted cash	(52,065)		220,354
Cash, cash equivalents and restricted cash
Beginning of the period	305,096		100,907
End of the period	$	253,031	$	321,261
Reconciliation of cash, cash equivalents and restricted cash to balance sheets:
Cash and cash equivalents	$	249,217	$	320,484
Restricted cash	3,814		777
Cash, cash equivalents and restricted cash in balance sheets	$	253,031	$	321,261
Supplemental cash flow information
Interest paid	$	3,573	$	3,566
Non-cash investing and financing activities

Transfer of evaluation units from inventory to property and equipment, net	$	203	$	(1,227)
Property and equipment included in accounts payable and other current liabilities	$	200	$	200
Deferred offering costs included in accounts payable and other current liabilities	$	—	$	819
Right-of-use assets obtained in exchange for operating lease liabilities	$	22,668	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

PROCEPT BioRobotics Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Organization

Description of Business

PROCEPT BioRobotics Corporation (the “Company”) is a surgical robotics company focused on advancing patient care by developing transformative solutions in urology. It develops, manufactures and sells the AquaBeam Robotic System, an advanced, image-guided, surgical robotic system 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 AquaBeam Robotic System employs 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 designed its AquaBeam Robotic System to enable consistent and reproducible BPH surgery outcomes. The Company received U.S. Food and Drug Administration clearance in December 2017 to market its AquaBeam Robotic System.

Liquidity

As of September 30, 2022, the Company had cash and cash equivalents of $249.2 million, and an accumulated deficit of $320.5 million. In September 2021, the Company completed its initial public offering (“IPO”) for net proceeds of approximately $172.4 million, after deducting underwriting discounts and commissions and offering expenses. Since its inception, the Company has financed its operations with a combination of debt and equity financing arrangements. The Company expects its cash, cash equivalents, and anticipated revenue will be sufficient to meet its capital requirements and fund its operations through at least the next twelve months from the issuance date of these financial statements. The Company has not achieved positive cash flow from operations to date and expects to continue incurring losses for the foreseeable future as it focuses on growing its business.

The COVID-19 pandemic and the resulting economic downturn are affecting business conditions in the industry in which the Company operates. In response to the pandemic, many state and local governments in the United States issued orders that temporarily precluded elective medical procedures in order to conserve scarce health system resources. The Company has taken necessary precautions to safeguard its employees, patients, customers, and other stakeholders from the COVID-19 pandemic, while maintaining business continuity to support its patients, customers and employees. The timing, extent and continuation of any increase in procedures, and any corresponding increase in sales of the Company’s products, and whether there could be a future decrease in the current level of procedures as a result of the COVID-19 pandemic or otherwise, remain uncertain and are subject to a variety of factors.

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements have been presented in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“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. The Company operates as one reportable segment.

Unaudited Interim Financial Statements

The accompanying balance sheet as of September 30, 2022, the statements of operations and comprehensive loss for the three and nine months ended September 30, 2022 and 2021, the statements of cash flows for the nine months ended September 30, 2022 and 2021, and the statements of redeemable convertible preferred stock and stockholders’ equity (deficit) as of September 30, 2022 and 2021, are unaudited. The financial data and other information disclosed in these notes to the financial statements related to September 30, 2022, and the three and nine

months ended September 30, 2022 and 2021, are also unaudited. The accompanying balance sheet as of December 31, 2021 have 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, 2022, and the results of its operations and cash flows for the three and nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022, are not necessarily indicative of results to be expected for the year ending December 31, 2022, 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 common stock valuation in periods before the Company’s IPO and related stock-based compensation expense, right-of-use lease asset, lease liability, and 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.

Initial Public Offering (IPO)

In September 2021, the Company completed its IPO by issuing 6,556,000 shares of common stock, and the exercise of the underwriters option for 983,400 shares, at an offering price of $25.00 per share, for total net proceeds of approximately $172.4 million, after deducting underwriting discounts and commissions of $13.2 million and offering expenses of $2.9 million. Offering costs are capitalized, and consist of fees and expenses incurred in connection with the sale of common stock in its IPO, including legal, accounting, printing and other IPO-related costs. Upon completion of its IPO, these deferred offering costs were reclassified to stockholders’ equity and recorded against the proceeds from the offering. In addition, all 29,912,264 shares of its then-outstanding redeemable convertible preferred stock automatically converted into 29,912,264 shares of common stock and it reclassified $329.5 million of redeemable convertible preferred stock to additional paid-in capital on its condensed consolidated balance sheet. Also, upon the completion of the Company’s IPO, the Company’s 62,454 redeemable convertible preferred stock warrants were exercised and the remaining unexercised warrants expired.

JOBS Act Accounting Election

The Company is an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to avail itself of this exemption and, therefore, for new or revised accounting standards applicable to public companies, the Company will be subject to an extended transition period until those standards would otherwise apply to private companies.

Recently Issued Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-4”). The amendments in ASU 2020-4 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship.

These amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires an entity to utilize a new impairment model known as the current expected credit loss (“CECL”) model to estimate its lifetime “expected credit loss” and record an allowance that, when deducted from the amortized cost basis of the financial assets and certain other instruments, including but not limited to available-for-sale debt securities. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security. ASU 2016-13 requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller reporting companies. ASU 2016-13 will be effective for the Company beginning January 1, 2023. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

Significant Accounting Policies

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization for property and equipment are determined using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. As of June 30, 2022, the Company no longer reclassifies inventory used at customer sites for evaluation purposes to property and equipment due to change in customary business practices.

Income Taxes

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 ( the Inflation Act) into law. The Inflation Act contains certain tax measures, including a corporate alternative minimum tax of 15% on some large corporations and an excise tax of 1% on corporate stock buy-backs. The Company expects the various provisions of the Inflation Act to not have a material impact on the Company’s condensed consolidated financial statements and related notes.

During the three months ended September 30, 2022, there have been no material changes to the Company’s significant accounting policies as described in its 2021 Annual Report or the first quarter 2022 Quarterly Report that could have had a material impact on the Company’s condensed consolidated financial statements and related notes.

3. Fair Value Measurements

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


	September 30, 2022
	Level 1		Level 2		Level 3		Total

Cash and cash equivalents:
Cash	$	12,077	$	—	$	—	$	12,077
Cash equivalents	237,140		—		—		$	237,140
Total cash and cash equivalents	$	249,217	$	—	$	—	$	249,217


Loan facility derivative liability	$	—	$	—	$	1,609	$	1,609


	December 31, 2021
	Level 1		Level 2		Level 3		Total

Cash and cash equivalents:
Cash	$	13,621	$	—	$	—	$	13,621
Cash equivalents	290,699		—		—		290,699
Total cash and cash equivalents	$	304,320	$	—	$	—	$	304,320


Loan facility derivative liability	$	—	$	—	$	1,496	$	1,496

Cash equivalents consist primarily of money market funds and treasury securities.

There were no transfers in and out of Level 3 during the three and nine months ended September 30, 2022 and year ended December 31, 2021.

The fair value of the loan facility derivative liability was determined using a discounted cash flow calculation discounted at 10%.

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):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Beginning of the period	$	1,570	$	1,787	$	1,496	$	1,782
Change in fair value	39		(177)		113		(172)
End of the period	$	1,609	$	1,610	$	1,609	$	1,610

4. Inventory

Inventory consists of the following (in thousands):


	September 30,		December 31,
	2022		2021

Raw materials	$	11,757	$	6,740
Work-in-process	1,890		905
Finished goods	8,711		5,502
Total inventory	$	22,358	$	13,147

5. Intangible Assets

In March 2019, the Company entered into a license agreement with HydroCision, Inc. This agreement grants the Company an exclusive, perpetual, irrevocable, worldwide, fully paid-up license to develop, manufacture and commercialize products in the field of urology using the patented technology and know-how controlled by HydroCision as of the effective date and as well as new patented technology developed by HydroCision that cover certain activities and improvements that relate to the use of fluid jet technology in connection with the licensed products during the period commencing on the effective date and ending on the earlier of the date that the Company ceases to use HydroCision’s existing contract manufacturers and the third anniversary of the effective date. Also included is the right to utilize HydroCision’s contract manufacturers, if desired. The consideration paid was a one-time upfront payment of $2.5 million, as well as allowing HydroCision (a reciprocal license) to use any new patented technology and know-how developed by the Company relating to the HydroCision patented technology and know-how in the field of urology for HydroCision use outside the field of urology. HydroCision will pay for any patent maintenance fees on HydroCision’s licensed patents. As of September 30, 2022 and December 31, 2021, accumulated amortization was $1.0 million and $0.8 million, respectively, and the net carrying amount is expected to be amortized at a rate of $0.3 million per year until fully amortized.

Amortization expense for intangible assets was $0.1 million and $0.2 million for the three and nine months ended September 30, 2022 and 2021.

6. Loan Facility and Derivative Liability

In September 2019, the Company entered into a loan facility for up to $75.0 million available in four installments. The Company borrowed $25.0 million in September 2019. An additional $25.0 million was borrowed in March 2020. The third installment of $10.0 million was originally available for draw through March 31, 2021 contingent upon achieving $20.0 million in trailing six months revenue. In January 2021, the third installment was amended to be available for draw through June 30, 2021 contingent upon achieving $6.4 million trailing six months revenue. The remaining $15.0 million was originally available for draw through June 30, 2021 and is contingent upon achieving $25.0 million in trailing six months revenue. In January 2021, this installment was amended to be available for draw through June 30, 2022. The facility bears an interest rate of the greater of (i) 9.37% and (ii) 7.17% plus 30 day LIBOR. The initial term of the facility is 60 months with interest-only payments each month for 24 months followed by 36 months amortization of principal and interest. In January 2021, the interest-only period was amended to 36 months followed by 24 months amortization (principal and interest) beginning October 1, 2022 since the amended trailing six months target revenue of $6.4 million was achieved, and accordingly, the current portion of the amount due was reclassified to non-current. Upon drawing the final $15.0 million tranche, the interest-only period was extended 12 months followed by 24 months amortization of principal and interest. Upon the completion of the Company raising over $50.0 million in its IPO in September 2021, interest-only payments were extended an additional 12 months followed by 12 months amortization of principal and interest. Substantially all assets of the Company are pledged as collateral. Commencing with the earlier of June 30, 2021 and the month following the funding of either the third or final installment, the Company is required to achieve revenues for the previous six months ended equal to the greater of (1) 70% of the forecast for the commensurate period, (2) $15.0 million if

neither third or final installments have been drawn, (3) $20.0 million if the third but not final installment has been drawn and (4) $25.0 million if both the third and final installments have been drawn.

The loan facility includes certain fees payable to the lender recorded as a loan discount that are accrued and amortized to interest expense during the loan term. A 6% final payment fee of each funded tranche is payable at the earlier of prepayment or loan maturity and a 0.25% facility fee paid at each funded tranche. A prepayment fee was originally payable if the loan is paid before maturity in the amount of 3% of loans outstanding if paid in full during first 12 months, 2% if loan is paid in full during second twelve months, or 1% if loan is paid in full thereafter before maturity. In January 2021, the prepayment fee was removed as part of the amendments. In addition, the Company would pay the lender’s loan initiation fees and a fee upon the earlier occurrence of a defined liquidity event, including but not limited to, a merger or sale of the Company’s assets or voting stock, or achieving a $200 million trailing twelve months revenue target, in each case, by September 2029. The success fees are calculated at the time of the liquidity event occurrence to be $1.0 million if only the first installment has been drawn, $2.0 million if the first two installments have been drawn, $2.4 million if the first three installments have been drawn, or $3.0 million if all four installments have been drawn, in each case, upon the occurrence of the defined liquidity event. As of September 30, 2022, the Company has drawn on the first two installments. The Company determined that this obligation to pay success fees represents freestanding financial instruments.

The amendments in January 2021 were accounted for as a debt modification under ASC 470-50-40 as the changes in the debt terms are not considered substantial, and thus no gain or loss was recorded and a new effective interest rate was established based on the carrying value of the loan and the revised cash flows.

In connection with the Company’s loan facility, the Company is obligated to pay a fee upon the earlier occurrence of a defined liquidity event, including but not limited to, a merger or sale of its assets or voting stock, or achieving a $200.0 million trailing twelve months revenue target, in each case, by September 2029. The fee is calculated at the time of the liquidity event occurrence to be $1.0 million if only the first installment has been drawn, $2.0 million if the first two installments have been drawn, $2.4 million if the first three installments have been drawn, or $3.0 million if all four installments have been drawn, in each case, upon the occurrence of the liquidity event. As of September 30, 2022, the Company has drawn on the first two installments. The Company has determined this fee is a freestanding derivative instrument. The initial $1.4 million fair value of this loan facility derivative was recorded as a debt discount and liability on the date of issuance in connection with obtaining additional financing as applicable and will be revalued every reporting period until the earlier occurrence of a defined liquidity event or achieving a revenue target by September 2029 or termination of such fee arrangement.

Subsequent to September 30, 2022, the Company paid the loan facility and related fees in full. See Note 12 for further information.

7. Stock-Based Compensation

Stock Options

The Company had 4.4 million shares available for grant as of September 30, 2022 under the 2021 Equity Incentive Award Plan. The Company ceased making awards under the 2008 Stock Plan upon the effective date of the Company’s IPO.

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


	Nine Months Ended
	September 30, 2022

	Number of Shares	Weighted Average Exercise Price
Outstanding, beginning of period	6,365	$	5.34
Granted	254	35.58
Exercised	(978)	3.72
Forfeited	(224)	7.75
Outstanding, end of period	5,417	6.95
Vested and expected to vest	5,417	6.95
Exercisable	3,142	5.27

As of September 30, 2022 and December 31, 2021, the aggregate pre-tax intrinsic value of options outstanding and exercisable was $113.7 million and $64.3 million, respectively, and the aggregate pre-tax intrinsic value options outstanding were $187.0 million and $125.7 million, respectively. The aggregate pre-tax intrinsic value of options exercised was $27.9 million and $5.1 million during the nine months ended September 30, 2022 and 2021, respectively.

As of September 30, 2022, there was a total of $9.7 million of unrecognized stock-based compensation expense related to stock options.

There were no stock options granted for the three months ended September 30, 2022. 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:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021

Expected life (years)	0.0			5.9			5.9			6.0
Expected volatility	—		%	53		%	55		%	50		%
Risk-free interest rate	—		%	0.9		%	2.5		%	1.0		%
Expected dividend rate	—		%	—		%	—		%	—		%
Weighted-average fair value	$	—		$	7.00		$	19.15		$	3.88

Restricted Stock Units

A summary of the Company’s restricted stock unit (“RSU”) activity and related information are as follows (restricted stock units in thousands):


	Nine Months Ended
	September 30, 2022

	Number of Shares	Weighted Average Grant Date Fair Value
Outstanding, beginning of period	35	$	34.78
Awarded	630	34.42

Forfeited	(29)	33.76
Outstanding, end of period	636	34.47

As of September 30, 2022, there was a total of $19.1 million of unrecognized stock-based compensation expense related to RSUs.

Employee Stock Purchase Plan

As of September 30, 2022, there was approximately $0.3 million of unrecognized cost related to employee stock purchases under the Employee Stock Purchase Plan (“ESPP”). This cost is expected to be recognized over a weighted average period of 0.5 years. As of September 30, 2022, a total of 0.8 million shares were available for issuance under the ESPP.

The fair value of the awards granted under the ESPP for the nine months ended September 30, 2022 to employees was estimated as of the grant date using the Black-Scholes model assuming the weighted-average assumptions listed in the following table:


	Nine Months Ended September 30,
	2022

Expected life (years)	0.8
Expected volatility	57		%
Risk-free interest rate	1.8		%
Expected dividend rate	—		%
Weighted-average fair value	$	12.25

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Cost of sales	$	337	$	62	$	712	$	135
Research and development	678		174		1,531		482
Sales, general and administrative	2,210		689		5,209		1,683
Total stock-based compensation	$	3,225	$	925	$	7,452	$